price gouging

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Price gouging is a frequently pejorative reference to a seller's asking a price that is much higher than what is seen as 'fair' under the circumstances. In precise, legal usage, it is the name of a felony that applies in some of the United States only during civil emergencies. In less precise usage, it can refer either to prices obtained by practices inconsistent with a competitive free market, or to windfall profits. In colloquial usage, it means simply that the speaker thinks the price is too high. Non-pejorative uses are generally in reaction to what the writer believes is an unjustified restraint on the market.

The economic theory of the free market suggests that, even in unusual circumstances, price controls do more harm than good by preventing incentives for the supply of needed goods. For example, in a disaster situation, a very high price for equipment (e.g. tents) will prompt hugely increased supply of the relevant goods. Libertarians are among those who robustly defend the right of firms to charge what they want regardless of the circumstances. The contrary argument is that emergency situations increase inequality markedly and allowing vendors to exploit emergency situations to gain extra profits is unequitable.

As a criminal offense, Florida's law is reasonably typical. Price gouging may be charged when a supplier of essential goods or services sharply raises the prices asked in anticipation of or during a civil emergency, or when it cancels or dishonors contracts in order to take advantage of an increase in prices related to such an emergency. The model case is a retailer who increases the price of existing stocks of milk and bread when a hurricane is imminent. It is a defense to show that the price increase mostly reflects increased costs, such as running an emergency generator, or hazard pay for workers.

The term is similar to profiteering but can be distinguished by being short-term and localized, and by a restriction to essentials such as food, clothing, shelter, medicine and equipment needed to preserve life, limb and property. In jurisdictions where there is no such crime, the term may still be used to pressure firms to refrain from such behavior.

Some support the ability to raise prices under such circumstances, asserting that government prohibition of the practice is a violation of individual rights or that the ability to raise prices has beneficial effects or both. While some economists who defend the practice use the term "price gouging", others disparage it as merely pejorative.

The term is not in widespread use in economic theory but is sometimes used to refer to practices of a coercive monopoly which raises prices above the market rate that would otherwise prevail in a competitive environment. [1] [2] Alternatively, it may refer to suppliers' benefiting to excess from a short-term change in the demand curve.

Criticism of price gouging

In the United States, laws against price gouging have been held constitutional as a valid exercise of the police power to preserve order during an emergency, and may be combined with anti-hoarding measures. The usual argument is fourfold.

1. The community as a whole may well possess sufficient stocks to sustain it through the emergency, provided that panic can be avoided. Sharp increases in price may trigger such panic.
2. When people's resources are strained by a situation beyond ordinary prudence, the corrective tendencies of the market are too slow and communication too uncertain.
3. In an emergency, ordinary legal protections are impractical. Thus, refusing to sell lumber at an advertised price may constitute fraud and refusing to honor a reservation may constitute a tort, but the harm is likely to be irreparable long before a case can be brought.
4. Regardless of theory, when people become desperate, public order becomes precarious. Emergency services are likely to be strained by both increased need and reduced capacity. Riots by otherwise law-abiding citizens could prove overwhelming.

Exceptions are prescribed for price increases that can be justified in terms of increased cost of supply, transportation or storage. Statutes generally give wide discretion not to prosecute: in 2004, the State of Florida determined that one-third of complaints were unfounded, and a large fraction of the remainder were handled by consent decrees, rather than prosecution.

In support of price gouging or of the liberty to engage in it

Many of those who support a right to "price gouging" regard the terminology itself as being designed to create prejudice against a legitimate and beneficial free-market system. They view the rapid increase of prices as a valid system for rapidly distributing scarce resources to those who need them most (as evidenced by what they are willing to offer in exchange) and rewarding those who have prepared for potential scarcity by taking steps to provide the highly desirable resources. Some hold that opponents of the free market prefer systems of distribution based on access to political power or willingness to wait in long lines. They also argue that since these systems do not reward the provider, there is decreased incentive for suppliers to plan for unusual demand situations, causing further scarcity.

Free market economists Thomas Sowell and Walter E. Williams, among others, argue against laws that interfere with large price changes. According to this view, high prices can be viewed as information for use in determining the best allocation of scarce resources for which there are multiple uses. They, in effect, reject the term "price gouging," and argue that laws against price increases serve only to restrict supplies of a good or service by reducing the incentive suppliers have to undertake any additional costs, hazards or inconvenience that may be required. They argue further saying that these price increases force consumers to ration goods thus increasing the longevity of certain resources in an emergency. Problems during the 1870 Siege of Paris, which critics attribute to price restrictions, are often held up as an example. In the same vein, economists Jerry Taylor & Peter VanDoren state: "Gougers are sending an important signal to market actors that something is scarce and that profits are available to those who produce or sell that something. Gouging thus sets off an economic chain reaction that ultimately remedies the shortages that led to the gouging in the first place."

See also

• Big Oil
• Big Business
• Asymmetric Price Transmission
• Monopoly
• Sherman Antitrust Act

External links

• Gas price gouging targeted by U.S. House, Tina Seely, Bloomberg News (May 24, 2007)
• Florida Attorney General FAQ Concerning Price Gouging
• Condemning Price Gouging with Respect to Motor Fuels Following Terrorist Acts of September 11, 2001 in the Congressional Record
• The Non-Crime of Price Gouging A criticism of laws against price gouging
• The Benefits of Price Gouging A defense of price gouging from an objectivist perspective
• Let ’Em Gouge: A Defense of Price Gouging by Jerry Taylor & Peter VanDoren
• Gas Gouging Rebuttal: An Essay Challenging the Claim of Price Gouging by Robert Rapier
• Studies on the perceived fairness of demand-based pricing.
• Account of the failed ambient temperature-based pricing of soda.
• There's Some Good in Gouging by Karen Selick, from The Globe and Mail
• Munger on Price Gouging podcast of discussion between economists Mike Munger and Russ Roberts on the effects of price gouging

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