Reply to post: Price Gouging: the free market libertarian perspective

World's smallest violin to be played for opportunistic sellers banned from eBay and Amazon for price gouging


Price Gouging: the free market libertarian perspective

I saw an interesting argument to allow price gouging. To me, this argument sounds like a good way to encourage robbery and shopflight, but I'd love to hear more nuanced takes on this theory:

"Anytime you have a sudden huge increase in demand, like for toilet paper or hand sanitizer recently, the price must rise to reflect that. If it doesn’t, there will be shortages and empty shelves. We can whine on social media all we want, but this will ALWAYS happen if prices aren’t allowed to rise. Which they aren’t allowed to, because we have “price gouging” laws and social media scolds which will severely punish retailers who raise prices above some arbitrary metric.

"The reason for the inevitability of hoarding and empty shelves is because the market value of the toilet paper or hand gel is suddenly far higher than what it’s being sold for. Thus, there’s no penalty for hoarding and over supplying, because even if the hoarding isn’t ultimately needed, no one has overpaid for the product, and can just use the toilet paper in the future. So you have a prisoner’s dilemma-type situation. Everyone can scoff at each other for hoarding and say it’s unethical, but the first person who hoards benefits tremendously by buying goods at way under market value. ...

"What “price gouging” does is to raise the cost of the good to the market clearing price, which is critical because it lets everyone know what the actual value of the good is, and sends the proper price signal to consumers and producers. With higher prices, if you hoard you are paying a huge penalty for doing so and taking a huge risk, because if prices drop in the future you’ll be a giant loser. Few will stock up on gallons of hand sanitizer or pallets of TP if it costs them a fortune. Additionally, it sends a signal to conserve those valuable resources and shift behavior if possible.

"The other benefit to price gouging is to give producers a huge incentive to produce more. Ramping up hand sanitizer gel production is now much more lucrative than producing hair gel, for instance. Allowing prices to function allows the market to allocate resources to their most productive use, which is what we want, particularly in dire situations. We want producers to up the supply and drive the price back down. If no price signal is given, there’s little incentive to do so.

"Whining about and prohibiting price gouging does two things; it guarantees shortages and hoarding, and lessens the incentive for producers and retailers to bring more product to the market."

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