Question

In: Economics

Why do many economists think that stores should be allowed to raise their prices after a...

Why do many economists think that stores should be allowed to raise their prices after a natural disaster? What are some arguments against price gouging?

Solutions

Expert Solution

Price gouging often takes place after a period of a demand or supply shock. Economists justify that stores should be allowed to raise prices after a natural disaster as the supply shrinks, but the demand remains the same and in order to make up for the difference, stores should charge more. This also prevents the customers from hoarding things during crisis and only lets them buy the things necessary.
Price gouging is not necessarily good, morally. This is because during any disaster the consumers are affected as well and increasing the prices seems only unfair to those who cannot afford. For instance, in the current pandemic situation, the prices for masks and hand sanitizers rose to a certain level and many could not afford it.
It is expected that with the increase in price, the producers will be able to produce more and eventually the price will fall, however, it is not always the case as there are high uncertainties.


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