Question

In Florida, it is against the law to sell essential commodities like food, water, ice, chemicals, and petroleum products at "unconscionable prices" during states of emergency.

This law, and laws like it in many other states or municipalities, are often referred to as anti-price gouging laws.

A) Based on the resources provided in the course, do such laws exacerbate shortages?

B) Do such laws make it easier for people to hoard or buy more than they need during states of emergency?

C) should businesses be allowed to raise prices on essential commodities?

Answer 1

A) Some economists believe that we can see high prices as information to determine the best allocation of scarce resources. Some argue that such laws prevent goods from going to individuals who value them the most. With price gouging laws, producers can charge a price set by law. At this price, producers have no incentive to increase the supply. But if they are allowed to charge a little higher price, they will increase the supply. Hence, the problem of shortage will reduce.

B) According to the theory of neoclassical economics, anti-price gouging laws prevent allocative efficiency. Such laws don't allow sellers to charge market-clearing price: the market-clearing price is the amount at which quantity supplied is equal to quantity demanded. Thus, if the lower price charged is lower than the market-clearing price then there would be excess demand. And people will start hoarding at a lower price. This would deprive some people of buying essentials during the states of emergency.

C) Charging unreasonably high prices should not be acceptable. But there are criticisms about price gauging that suggest that some flexibility should be given to suppliers while deciding prices during an emergency.  "Doubling the price will make customers think twice about buying another gallon of milk, for example, thus leaving supply for those who didn’t arrive at dawn," Mohammed wrote. Thus, raising prices up to a certain level should be allowed to customers.