Question

1. What are the pros and cons of price gouging?
2. From an economic point of view, what is the role of price gouging in markets?
3. Are there instances in which price gouging is an acceptable practice?
4. Why or why wouldn't price ceilings work in situations of natural disasters?

Answer 1

Pros of Price Gouging

Limits storage:

During emergency circumstances, people panic, and they try to store basic goods like food, water, and other things for survival. Because of this, they buy more than what they need which leaves nothing for other people.

Price gouging makes them buy products in limit and which leaves plenty of stock for others.

Value realization:

During emergency calamities, people come to realize the importance of basic goods like food and water, etc. and they learn that how important these things are for them, which makes them not to waste these goods in their daily use once the circumstances have become normal.

Disadvantages of Price Gouging

Customers pay high prices:

Price gouging is unfair for common people as they have to pay much higher prices for the goods that they need the most. For example, in the Houston area, there was a shortage of food and water supplies in 2017 because of the malfunctioning water work and delay in the delivery of goods.

There one water bottle’s case was being sold at $42.96 at a local Best Buy store which is unfair for the people.

Defamation of brands:

The decision of increasing the price of goods usually taken by local retailers, whereas the companies which manufacture these products are completely unaware of the price increase. When people get goods at increased prices, they build a bad image of the brand rather than the retailers.

Same happened in the Houston area case; a person took the photograph of the price tag in the best buy store and posted it on social media.

Which brought the attention of the “best Buy” about the matter and they even apologized, stating that this happened because of the overzealous store manager.

Such incidences ruin the image of brands that they have built over time by spending millions on marketing, and advertising and companies have to invest again to build the image of the brand again to win the trust of their customers.

Social Degradation:

During the times of natural calamities, when people come forward to help affected people. At such times, retailers sell goods at a high price, which not only cause the bad social image of the store but also cause humiliation if opposed by people and in the presence of social media the repercussions can even become worst for the retailer.

Therefore, it will be good for retailers not to take advantage of the situation and charge higher prices. However, they can increase the prices up to some limit if they are themselves getting goods at hiked prices of transportation, etc.

The role of price gouging in markets in economic point of view

On the demand side, laws that keep prices artificially low can encourage overbuying. They benefit the people who get to the store first.

“If prices don’t rise,” explained Texas Tech economics professor Michael Giberson, “they just get plenty.”

If water is cheap, I might be tempted to buy as much as I can jam in my car — just in case. If, on the other hand, prices shoot up, Giberson said, “it encourages consumers to be a little more careful in using the goods.”

There’s also a supply-side argument that economists make.

“When the price of vital goods go up in an area affected by an emergency, that sends a signal by areas not affected by the emergency to bring more,” explained Matt Zwolinski, director of the University of San Diego’s Center for Ethics, Economics, and Public Policy.

Zwolinski argues that the practice of price gouging can actually be admirable from a purely moral perspective: “It allocates goods and services in a way that best meets human needs.”