The problem with price gouging laws

When disaster strike and supplies are in short supply sellers respond by raising prices. They do this because, demand is high and in that moment people are willing to pay higher prices for a normally low priced good. This in practice is called price gouging and it is happening right now. The corona virus has instigated shortage. And people are raising prices for essential supplies like hand sanitizer, toilet papers and food supplies. States, including Minnesota, have reacted by putting in strict anti price gouging laws.

The morality of the issue aside, making price gouging illegal poses serious consequences on people. What we call price gouging is demand and supply interacting to signal market conditions. Prices need to rise during shortage in order to signal to suppliers there is urgent demand.

Price Gouging laws cause harm

In normal circumstances, markets have an everflowing supply of goods to supply to customers. The case is different in a time like this when disruptions to the economy cannot provide every individual with all their wants and needs. It becomes a matter of who values what good more than the other. In a sense, the rise in prices is only a manifestation of shortage which has to be satisfied. Without a rise in prices suppliers will not get a sense of where demand is most urgent to be satisfied. Keeping prices the same conveys the message that nothing has changed in the market, that there is no shortage. Nothing therefore motivates extra production or entrepreneurship and innovative ways to reach customers.

Price gouging even though it aims to protect customers, may end up hurting them. Making higher prices illegal not only restricts supply, but prevents people who can buy at a higher price from obtaining services. Generally,

if you cap price increases during an emergency, you discourage conservation of needed goods at exactly the time they are in high demand. Simultaneously, price caps discourage extraordinary supply efforts that would help bring goods in high demand into the affected area. In a classic case of unintended consequences, the law harms the very people whom lawmakers intend to help.