A Defense for Price Gouging

A Defense for Price Gouging 

Earlier this year, a U.S. News report by Cara Murez and Robin Foster reminded readers of the disturbing shortage of COVID-19 tests across the United States. The tests that are available sell for incredibly high prices. In a quote from New York Attorney General Letita James, “A standard BinaxNOW brand test kit at a New York store, like Walgreens, costs appropriately between $14 and $25 for a package of two tests, however, there has been alleged reports of the same products being unlawfully sold for more than $40 and up to $70 per package” (Murez and Foster). To paraphrase, in some stores, the tests are being sold for almost three times as much as what is “appropriate”. It is even more difficult to find inexpensive tests online; ten boxes of BinaxNOW test kits can sell for as high as $349! I’m a college student; where am I supposed to get that kind of money? It’s also the middle of a pandemic; where is anyone supposed to get that kind of money? Given our country’s state of emergency, one would think that the sellers of these tests would have more decency than to charge such exorbitant prices – especially since price gouging is illegal in the state of New York. One would have to be mad to suggest that such high pricing of necessary goods during an emergency period (Zwolinski, The Ethics of Price Gouging) should be allowed!  

Side note, but I think I might be mad.  

That’s right; as counterintuitive as it seems, as much as people seem to dislike it, condemn it, outright hate it, I have reached the conclusion that it would in fact be better if, at least generally, price gouging was made legal. I can already hear people shouting. Let it be known that I did not want to come to this conclusion. When I began seriously researching this topic, I was ready to find any information or arguments that might justify the existence of anti-price gouging laws. The evidence that I have collected, however, points to a different conclusion. I argue for the legalization of price gouging not as a heartfelt apologist for capitalism, but as a principled skeptic who must follow the evidence where it leads.  

It all started about two years ago. I was a freshman at the University of San Diego, and I had an incredibly inspirational economics and philosophy professor, a Dr. Matt Zwolinski. Zwolinski wrote an article arguing that price gouging is morally permissible and should be legal. In his words, he rebuts “three widely held beliefs about the ethics of price gouging: 1) that laws prohibiting price gouging are morally justified, 2) that price gouging is morally impermissible behavior, even if it ought not be illegal, and 3) that price gouging reflects poorly on the moral character of those who engage in it, even if the act itself is not morally impermissible” (Zwolinski, The Ethics of Price Gouging). One of his main points is that while price gougers deliver some benefit to some victims, most of us do nothing to help solve problems caused by a natural disaster. He uses the example of a hurricane in North Carolina. Four men from a nearby town bought 500 bags of ice for $1.20 each and then brought them to the disaster zone to sell for $12 a bag. The initial instinct most people seem to have when I tell them about this is disgust and moral condemnation. Then again, while these four men brought much-needed resources to some people in need, I haven’t done anything to help at all. What can I say? I’m a busy guy. Maybe it was for a good reason, but the fact is that the price gougers in this situation delivered ice, a necessary good, to people who needed them most and offered them one extra path forward without forcing them to take it. Meanwhile, I knew that people in the world were suffering and didn’t do anything to help. If the price gougers did something wrong, then I must have done something worse.  

As part of my research, I reread Zwolinski’s article and looked for empirical sources regarding price gouging. As much as I enjoy philosophy, that alone wasn’t going to convince me to make something legal. Firstly, there is Michael Tarrant, a then Montana State University graduate student in applied economics at the time this thesis was published. He created statistical models to compare the growth and reconstruction of several counties after experiencing a natural disaster (particularly hurricanes). His goal was to measure the empirical effects of anti-price gouging laws (APG laws) from 1970 to 2012. According to economic theory, legally binding price ceilings on any commodity result in shortages; they lead to a greater quantity demanded than supplied by the market. After a nuanced and detailed analysis, Tarrant concludes by saying that his results “support standard economic theory regarding price ceilings and counter political rhetoric in support of APG laws” (Tarrant). Despite what voters and politicians may believe, the economic reality of price gouging doesn’t seem to support the public’s negative attitude towards it.   

Similar conclusions were reached in other studies as well. Drs. Chakraborti and Roberts, economists from Christopher Newport University and Weber State University, respectively, studied the effects of preexisting and newly implemented price gouging laws during the COVID-19 pandemic. Specifically, they looked at the markets and online searches for hand sanitizer and toilet paper within each state; some already had price-gouging statutes, some implemented new ones during the pandemic, and some don’t have any at all. “Our results are consistent with standard microeconomic theory,” they say, “If price-gouging regulations bind during a public emergency, then they will cause shortages leading consumers to invest more in search for products” (Chakraborti and Roberts). The expectation of a shortage, which seems to be stronger in places with price controls and strongest where they existed before the pandemic, correlates with a greater increase in online searches for hand sanitizer and toilet paper. We can assume that an increase in these searches correlates with greater demand. Under market conditions, this would lead to greater prices and incentivize more suppliers to enter while discouraging consumers from purchasing too much. With price-gouging regulations, however, a shortage is not only expected, but its onset is accelerated.  

What about more complex industries, such as housing? Economists Edward Glaeser and Erzo Luttmer from Harvard University and Dartmouth College, respectively, analyzed the effects of rent controls in large cities. They gathered data from apartments in Chicago, Hartford, and New York City, the last of which had rent controls while the other two were “free-market” cities. They arrived at two major conclusions. The first is that “for moderately sized rent controls, the losses due to misallocation are larger than the losses due to undersupply” (Glaeser and Luttmer). That is, whatever negative consequences result from allowing a free market for housing, the losses are even worse when introducing laws that prevent reaching equilibrium prices. The second is that “20 percent of apartments [in New York City] are in the wrong hands” (Glaeser and Luttmer). Glaeser and Luttmer created a model to predict how many apartments in New York have been misallocated, and while the model does contain many assumptions, the results indicate that at best, further research into this topic is justified. At worst, there are many apartments in the city that are underutilized and therefore unnecessarily leave some people without a place to live.  

You may have noticed that I have mainly focused on the consequences of price-gouging laws, pointing out that they lead to shortages and misallocations. There is a reason for this; I believe that, above all, the law should take consequences of policy as a priority. The point of laws is not to legislate one’s personal morality, but rather to eliminate behavior that is extremely unjust to the point that society cannot function if it is protected. Laws are a matter of practicality, not ethics. However, I understand that some readers may not be convinced by this. Perhaps you share a similar sentiment to Dr. Jeremy Snyder, a professor of ethics at Simon Fraser University. He wrote a response to Dr. Zwolinski’s arguments for the legalization of price gouging and his claims that it is morally permissible. “I agree,” he says, “that the efficient provision of essential goods is important as I argue for the goal of equitable access to sufficient of the goods essential to living a minimally flourishing human life. However, efficiency is a means to this goal rather than the end itself” (Snyder). The point of price gouging is to provide resources to people who need it, but Zwolinski seems to view efficiency as the end goal rather than equity. Snyder also challenges Zwolinski on his premise of the “non-worseness claim” (NWC). In short, the NWC proposes that in cases in which a transaction between two people is possible, but not forced, then it cannot be seriously wrong for them to engage in the transaction. While Snyder never explicitly states the reasons for why the NWC is flawed, the examples he proposes imply that there is something immoral inherently about a large imbalance in resources or power. For instance, he uses the following example of two people getting married: “Should A agree to marry B only if B will agree to an unfair distribution of financial arrangements, childcare, and household labor, we can still say that A shapes the relationship in a morally impermissible way even if both parties benefit from the relationship” (Snyder). Although both A and B are technically “better off” because of this transaction, I am sure that most people would agree with Snyder that an “unfair distribution” makes the relationship “morally impermissible”. Similarly, while a price gouger and a consumer may simultaneously benefit from a transaction, this is irrelevant because the difference in power between them is so large. It is still “wrong” to engage in the transaction.  

I have reached out to Dr. Zwolinski to ask him some questions about his article and to give him a chance to respond to Snyder’s arguments. Here’s part of his response (edited to make more sense without the same context):  

 

I think that the case for price gouging is one that is built on assumptions of imperfect knowledge. Part of the reason why it’s okay to charge high prices for goods in short supply is because you don’t know these people, you don’t know what they need. They can tell you a story, but you have no way of determining whether the story is true or false. Price is a mechanism for distributing resources during a period of high uncertainty.   

One of the ways I like to explain this to people is that the problem is caused by an underlying emergency. The situation has created an emergency of scarcity in which there are not enough resources to go around. And simply banning price gouging itself doesn’t do anything to fix that imbalance between supply and demand. Allowing market prices to work itself out is not perfect – some people’s needs will go unmet – but that is going to be the same with every solution. That’s why it’s a disaster. If there was a perfect solution, then of course that’s what we should go for, but unfortunately that’s just not on the table.   

In my gut, what’s objectionable with Snyder’s marriage example is that there is the ongoing, inegalitarian or oppressive relationship depending on how power is distributed between the two parties. There’s the transaction, you give me A, I’ll give you B, and then there’s marriage in which we have certain standards for as a society and as a culture. (Zwolinski, Personal Interview) 

 

There are a few things to note here. First, the point of price gouging is not to “exploit” or “coerce” anybody, but rather to distribute scarce resources during a period of high uncertainty. In the event of a disaster, such as a hurricane or a pandemic, food, water, medicine, and other supplies become less available. There is simply no way to avoid this or ration things perfectly. We can call price gouging “exploitative” or “unfair” all day long, but that doesn’t solve the underlying issue of figuring out how to distribute scarce resources.  

Secondly, there is imperfect knowledge. Practically, there isn’t a feasible way to determine what everyone needs during an emergency. Unless you know the person specifically and have a relationship with them, how are you going to know that they need the good that you have more than everyone else waiting in line? How can you repeat this process for each person on a scale of hundreds, maybe thousands, of victims? Price is by no means a perfect mechanism for distributing goods, but it is a practical one.  

Lastly, there is Zwolinski’s response to Snyder’s marriage example that is meant to challenge the NWC. It is entirely possible – dare I say, obvious – that there are counterexamples of moral dilemmas that seem to disprove the NWC. However, since price gouging is about people interacting one time during a transaction, rather than a long-term arrangement that is difficult to break, then we should seriously consider the possibility that the injustices of allocating resources inefficiently outweigh the injustices that arise from price gouging. Think back to the empirical studies. Which is worse: the misallocation of COVID tests, hand sanitizer, toilet paper, and places to live, so that more people than are necessary go without them, or customers being “forced” to pay a higher price for them? Personally, as upset as I would be about it, I would rather have to pay an extra $200 a month for rent than have nowhere to stay at all. At least once I pay the landlord, he’s no longer my problem, whereas the dead, harsh, frigid, dangerous outside world won’t care that I have no walls to protect me.  

For those feeling dejected by my arguments so far, let me reassure you that there may be a silver lining. Keep in mind that I am arguing for the legalization of price gouging; it should be allowed, but that doesn’t mean it should happen whenever possible. Consider the following study: Cabral and Xu, a Paganelli-Bull Professor of Economics and Research Fellow, and a Senior Economist, respectively, collected and analyzed data about masks sold between January and March 2020 (the beginning of the COVID-19 pandemic). They discovered that new sellers who entered the market “increase price by 178%, whereas the continuing sellers’ increase is limited to 56.7%” (Cabral and Xu). Seller reputation appears to be a significant factor in determining the level of price gouging a firm will engage in during an emergency period. I would have guessed that larger companies would be more likely to increase prices, but it turns out that smaller companies raise them even more. The results support another significant article from 1995 - twenty-five years before the pandemic! Franciosi, et. al., published an article in The Economic Journal (published by Oxford University) to investigate people’s interpretations of “fair” prices. Their results state that “if…buyers are more receptive to price increases that appear to be cost justified than to price increases that increase profits above reference transaction levels, then, recognizing this, sellers will post lower prices under profit disclosure than under marginal cost disclosure” (Franciosi, Kujal and Michelitsch). In general, consumers tend to be more understanding of price increases if they know that the firm is facing competition or higher input costs than if the increases are meant solely to raise profit. As a result, big companies with large name recognition will raise prices after a natural disaster such as a hurricane, but not enough to meet the new “market” price. They purposely avoid it to protect their reputation.  

Why is this important? Because it explicitly states what seems obvious once it is pointed out: Just because something is legal doesn’t mean we can’t criticize people and companies who do things we dislike. In both past and present, large companies with high name recognition have prevented prices from increasing too much during times of crisis. They recognize that, optically, it would be terrible for them to ignore their customers’ suffering. No need for a restrictive law when social pressure will do the job just as well.  

Is economics not a social science?  

I don’t call for the legalization of price gouging because I like it. I think most people, even after considering the reasons I’ve given, will still feel a sense of disgust at the idea of it. I call for the legalization of price gouging because consumers are not the only ones who have to weigh trade-offs. Companies must decide whether it is better for them to keep prices affordable, or, because it is a difficult time for them too, to raise prices further than everyone else to the public’s dismay. Neither decision works for everyone, but it does help society cope with a disaster and allows it to recover more quickly. Paul Boyce, the author of the economics website Boyce Wire, recently wrote about price gouging, saying, “Price gouging is seen as unethical and morally wrong as sellers take advantage of buyers by significantly raising prices…. Yet at the same time, it creates the most optimal allocation of resources” (Boyce). So, price-gouging is immoral, but Boyce cannot deny the positive economic effects. Why can we not have the same attitude? Why can we not separate our moral disgust and contempt for something with the logical recognition that society is simply better off if that something is legal?   

The experts, the consequences, and the philosophy all point in the same direction: price gouging should be legal. This is still an area that requires much more research to figure out the finer details, but until that research is done, the best evidence that we have goes against public opinion and political talking points. When it comes to price gouging, following the “wisdom of the crowd” is the most foolish thing we can do.   

Bibliography 

Boyce, Paul. Price Gouging Definition. Prod. BoyceWire. 10 January 2022. 

Cabral, Luis and Lei Xu. "Seller reputation and price gouging: Evidence from the COVID-19 pandemic." Economic Inquiry (2021): 867-879. 

Chakraborti, R. and G. Roberts. "Learning to Hoard: The Effects of Preexisting and Surprise Price Regulation During the COVID-19 Pandemic." Journal of Consum Policy (2021): 1-23. 

Franciosi, Robert, et al. "Fairness: Effect on Temporary and Equilibrium Prices in Posted-Offer Markets." The Economic Journal 105.431 (1995): 938-950. 

Glaeser, Edward L. and Erzo F. P. Luttmer. "The Misallocation of Housing Under Rent Control." American Economic Review 93.4 (2003): 1027-1046. 

Henderson, David. A Poll of Economists on Price Gouging. 15 September 2017. Blog. 

Murez, Cara and Robin Foster. "Amid COVID Test Shortages, Price Gouging Is on the Rise." News. 2022. News. 

Snyder, Jeremy. "Efficiency, Equity, and Price Gouging: A Response to Zwolinski." Business Ethics Quarterly (2009): 303-307. 

Tarrant, Michael Steven. "The Effects of Anti-Price Gouging Laws in the Wake of a Hurricane." ScholarWorks (2015). 

Zwolinski, Matt. Personal Interview Nicolas DiBenedetto. 2 March 2022. 

—. "The Ethics of Price Gouging." Business Ethics Quarterly (2008): 347-378.