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Price gouging refers to a seller asking a price for a good or service that is much higher than what is seen as the 'fair' price. It is usually used in a perjorative sense to imply the price is unethical. However, according to economic theory what is referred to as 'price gouging' can be regarded as a rational response to differing circumstances. Some people also robustly defend the right of firms to charge what they want regardless of the circumstances. In very rough legal terms, which is the most common usage, price gouging is the practice of those supplying goods and services sharply raising the prices asked in anticipation of or during a civil emergency, or cancelling contracts in order to take advantage of an increase in prices related to such an emergency. The term is similar to profiteering but cn be distinguished by being short-term and localized, and by a restriction to essentials such as food, clothing, shelter, medicine and equipment needed to preserve life, limb and property. In many jurisdictions, price gouging is a felony. Some support the ability to raise prices under such circumstances, asserting that government prohibition of the practice is a violation of individual rights or that the ability to raise prices has beneficial effects or both. While some economists who defend the practice use the term "price gouging", others disparage it as merely pejorative. The term is not in widespread use in economic theory but is sometimes used to refer to practices of a coercive monopoly which raises prices above the market rate that would otherwise prevail in perfect competition. 1 Alternatively, it may refer to suppliers benefiting to excess from a short-term change in the demand curve. Criticism of price gougingIn a market economy, laws against price gouging are justified by many as a valid exercise of the police power to preserve order during an emergency, and may be combined with anti-hoarding measures. The usual argument is fourfold.
Exceptions are generally made for price increases that can be justified in terms of increased cost of supply, transportation or storage. Statutes generally give wide discretion not to prosecute: in 2004, the State of Florida determined that one-third of complaints were unfounded, and a large fraction of the remainder were handled by consent decrees, rather than prosecution. In support of price gouging or of the liberty to engage in itMany of those who support a right to "price gouging" regard the terminology itself as being designed to create prejudice against a legitimate and beneficial free-market system. They view the rapid increase of prices as a valid system for rapidly distributing scarce resources to those who need them most (as evidenced by what they are willing to offer in exchange) and rewarding those who have prepared for potential scarcity by taking steps to provide the highly desirable resources. Some hold that opponents of the free market prefer systems of distribution based on access to political power or willingness to wait in long lines. They also argue that since these systems do not reward the provider, there is decreased incentive for suppliers to plan for unusual demand situations, causing further scarcity. Free market economists Thomas Sowell and Walter Williams, among others, argue against laws that interfere with large price changes. According to this view, high prices can be viewed as information for use in determining the best allocation of scarce resources for which there are multiple uses. They, in effect, reject the term "price gouging," and argue that laws against price increases serve only to restrict supplies of a good or service by reducing the incentive suppliers have to undertake any additional costs, hazards or inconvenience that may be required. They argue further saying that these price increases force consumers to ration goods thus increasing the longevity of certain resources in an emergency. Problems during the 1870 Siege of Paris, which critics attribute to price restrictions, are often held up as an example. In the same vein, economists Jerry Taylor & Peter VanDoren state: "Gougers are sending an important signal to market actors that something is scarce and that profits are available to those who produce or sell that something. Gouging thus sets off an economic chain reaction that ultimately remedies the shortages that led to the gouging in the first place." As a side note, in colloquial terms "price gouging" has come to be somewhat misunderstood by the general public, becoming frequently attached, inappropriately or disparagingly, to any situation where, even in the presence of a free market with many different options, prices rise uniformly for a commodity in high demand. This is not strictly price gouging, i.e. exploiting an emergency situation where the free market participants are facing lack of information or competitors, but rather a populist reaction to a natural (although very sudden) market driven change in prices. An example of this reaction can be seen in the gasoline market in Hawaii, which operates with a relatively sparse number of suppliers and costly infrastructure, though still a fully functioning market environment. In such markets, any increase in price seems to automatically receive the explanation of "price gouging", although no official emergency exists. In a related topic, the negative associations attached to price gouging can be seen as an offshoot of the phenomenon where customers are highly averse to purely demand-based price changes in some types of goods and services. That is, for certain commodities, where the historical baseline price is widely known, customers exhibit strong negative feelings for prices which change solely based on the number of buyers, without any additional (perceived or real) increases in quality or quantity of goods received. While some goods and services are highly amenable to demand-based pricing, for example, golf course fees or airline tickets, others generate significant negative reaction, such as the failed attempt by one soda distributor to price cans of soda based on the ambient temperature. A standard criticism of such practice is that the pricing bears no relation to any additional cost of doing business -- which would be valid if the obligation of sellers were to simply pass on minimal changes in cost. However, on closer inspection this position is more simply an adverse reaction to the market fact that when a good or service is demanded generally by more buyers, whether or not additional costs have been incurred, or benefits given, sellers will increase the price to balance the supply with demand. External links
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