WRITTEN ASSIGNMENT
Is Price Gouging Immoral?
Eldar Rahman
SCHOOL OF ECONOMICS AND BUSINESS SARAJEVO Trg oslobođenja - Alija Izetbegović 1,
Sarajevo 71000
Table of Contents
Introduction ............................................................................................................................................. 2
Body ............................................................................................................................................................ 2
Conclusion/Finding Concensus ........................................................................................................ 6
Literature.................................................................................................................................................. 7
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Introduction
From ancient times and first trade routes and currency, the market was never a constant
system with predetermined factors such as supply, demand or price. Henceforth, the market
is a fluid occurrence, just like water, it changes its shape and state by these factors. There
is a variety of external variables affecting these factors and therefore, the market itself. The
price, as a factor, is very sensitive and flexible and often, it can be manipulated and
increased beyond the point of fairness, especially in a time of great disaster, whether it is
natural or economical. This act is called „price gouging". An old saying states: „Desperate
times require desperate measures.", but, at what cost?
Arguably, natural disasters are capable of causing the most painful blow to humanity and
society. The reason behind their ruthlessness lies in the fact that they are almost
unavoidable and their outcome is incredibly unpredictable. However, thanks to
advancements in modern technology, various meteorological instruments can predict them
on time to ensure the preparation of those who will be affected by the „wrath of nature".
However, in times of desperation, when danger is closing by, people start to panic and
begin to stock up on basic resources and products, such as water, flour and food, and in the
case of the current pandemic of COVID-19 virus, toilet paper, and hygienic products. In
late August 2017, hurricane Harvey hit the southern states of the USA, where the state of
Texas suffered greatest damages. It is the second most costly hurricane to the USA since
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1900, causing a whopping $125 billion in damages (World Vision, 2017). In this time of
crisis, an act of price gouging was observed. The increase in prices of gas, food and other
necessities occurred. Professor Richard Wolff, as an economist, is on the „against" side of
debate questioning the ethics of this act. According to tho Wolff's explanation, the suppliers
will try to stock up on the necessities when prices are low, ensuring the first part of this
act. Following the crisis, the demand for certain goods will increase and those who didn't
prepare and secured the necessities will suffer the most. An increase in demand caused by
panic and rush led to a shortage on the market. However, Wolff argues that price gouging
will not certainly increase the supply by any means. Instead, the gougers (suppliers) will
limit their stockpiles to keep the price high, following the sudden release to increase the
supply, which will drive the prices down. Arguably, this can be seen as a direct
manipulation of the market. Besides, Wolff argues that markets are unjust, which can be
observed in the time of crisis. He argues that the market serves those who have the most,
not those who need the most. The perfectly competitive market is almost impossible in
reality, but it can be argued that this theory can be a foundation to pursue the most favorable
market platform for everyone.
Going forward with the topic, the question of the law's perspective on price gouging should
be discussed. A perspective of Art Coden, an economist, on this issue somewhat differs
from that of Prof. Richard Wolff's. Coden, during his interview with John Stossel, uses the
term „price as a signal flare“. This refers to the property of a price as a factor, where the
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price acts as a signal both to consumers and producers. If the price is high, that can be the
signal to producers that the demand for a product is increased, so they can proceed to
produce more, whereas for the customers to think before they purchase the product, in this
case, the utility the product brings and possible uses to them. Therefore, a consumer can
make a cost-benefit analysis to value the product. However, when it comes to price gouging
in the times in crisis, an opinion of experts Wolff and Coden is divided. While Wolff states
that the presence of a system that should serve those in need in crisis instead of a market
as a system could prevent price gouging, Coden relies more on the power of a market.
Using an example of generators from Kentucky sold in Mississippi for double their price
during the hurricane Katrina, which were confiscated and the person responsible was
apprehended for his offense, Coden describes the failure of a system to handle the needs of
those affected by the catastrophe. As the generators were confiscated, those in need were
unable to acquire them, so nobody benefited from this situation. Also, even if the sellers
are willing to sell their products to crisis-stricken areas for extra profit, they must be aware
of the consequences their actions may bring. By this, the government has an authority to
regulate the prices by different means, and can even directly set a price of a good or define
it within boundaries. This can dissuade the suppliers to provide the goods to the market,
and therefore a shortage may occur. A law should regulate the market only to the point
where its state benefits both producers and consumers the most.
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Disasters and crises previously discussed are not the only „environment" where price
gouging can occur. Instead, the phenomenon is widespread and present every day,
everywhere, even if we cannot observe it. An article by Michael Hiltzik of the Los Angeles
Times depicts the „bigger picture" on price gouging, using the „$2500 ticket for
„Hamilton", purchased by Harvard professor N. Gregory Mankiw and his corresponding
attitude towards the act. Hiltzik counters the statements of Mankiw, who is arguably in
favor of price gauging. Alas, Hiltzik tries to compare the occurrence to those in an
emergency, like overpricing water bottles and such necessities, taking an attitude in favor
of ethics. Even though Hiltzik's arguments are powerful and based upon facts, from the
personal point of view, such occasions of disasters cannot be compared to purchasing a
luxury from a scalper by any valid means. The reason behind this statement lies in the pure
fact of quality of a good, its nature and type. The market indeed benefits those who have
the most, but a person in an emergency has no use of a luxury good, while the resource like
water is crucial for survival, and surely consumers who possess a vast amount of money
may have no regrets (costs) spending more on „a ticket". Therefore, a situation is a key
element in defining the wrongness of price gouging.
Conclusion / Finding concensus
Price gouging is a very „sticky“ phenomenon. Certainly, the solution to prevent it or
dissuade from it is a challenging task to find. The complexity of an issue requires a very
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careful set of measures to control it. From an ethical side, it also has more sides with equally
valid arguments: It is wrong to deprive those in need who can't afford a good due to its
high price, but also it may be crucial to cover the different costs of a seller struck by the
catastrophe, like the vendor in New Jersey, mentioned in John Stossel's interview. The
government might struggle too to find the proper solution because the „wrong move" can
damage the equilibrium of a market and end up in cost, rather than a benefit for everyone.
In conclusion, the perspective on this issue should be in accordance to the situation,
especially in a case of a crisis, where the government should try to ensure fair price
boundaries for goods, but also not severely punish gougers if the measures set to fail to
maintain the equilibrium during the crisis. The market is always in a fluid state and will
always maintain the fluidity, infinitely adapting to the current situation.
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Literature
1. Democracy At Work, 2017, EconoMinute: Price Gouging [video online] Available at:
https://www.youtube.com/watch?v=ZtZNw360x6c [Accessed: 30 March 2020]
2. Liberty Pen, 2012, John Stossel - Is Price Gouging Bad? [video online] Available at:
https://www.youtube.com/watch?v=Yr5_049654Q [Accessed: 30 March 2020]
3. John Stossel, 2005, In praise of price gouging [online] Available at:
https://townhall.com/columnists/johnstossel/2005/09/07/in-praise-of-price-gougingn1359411 [Accessed: 30 March 2020]
4. Michael Hiltzik, 2016, Column: Dear Harvard prof: Your $2,500 ticket for
‘Hamilton’ doesn’t mean price-gouging is a good thing [online] Available at:
https://www.latimes.com/business/hiltzik/la-fi-hiltzik-price-gouging-20161024snap-story.html [Accessed: 30 March 2020]
5. Chris Huber, 2018, 2017 Hurricane Harvey: Facts, FAQs, and how to help [online]
Available
at:
https://www.worldvision.org/disaster-relief-news-stories/2017-
hurricane-harvey-facts [Accessed: 30 March 2020]
6. Tejvan Pettinger, 2018, Government Price Controls [online] Available at:
https://www.economicshelp.org/blog/69/markets/government-price-control/
[Accessed: 30 March 2020]
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