Why price gouging

Consider first the demand side : Price spikes very often occur for essential products — those that consumers need, and for which demand tends to be relatively inelastic unaffected by price. When we see shortages of non-essential products, economists typically think that the best way to ration them restrict who gets to buy them is by using price. Typically, the people who most value the product are also those willing to pay the most: under price-based rationing, they will be the purchasers.

People working in care homes on a minimum wage may need hand sanitisers more than office workers working from home, but they are likely to be less able to pay an extortionate price. In such a situation, price-based rationing will not be the best way to ensure that products go to the people who value them most.

It may also harm the least well off. For example, providing hand sanitisers to essential workers may help to slow transmission of the virus and provide positive benefits for wider society. To the extent that higher prices are driven by such factors, this will tend to harm society.

It may also have implications for inequalities between people. Products will be bought by those who are most cautious or worried, those most able to search for supplies or those most able to afford to stock up. Products may not necessarily be bought by those who value them the most.

Now consider the supply side : Sharp increases in price may not be necessary to encourage firms to increase the amount they supply, or to enter a market. First, there may be limited flexibility to increase short-run supply in response to a short-run price rise. Second, even where there is such flexibility, high current prices do not need to be excessively high to signal an immediate supply-demand imbalance. Indeed, where information on the imbalance between supply and demand is easily available, this may be sufficient to encourage firms to expand supply without any need for a large increase in prices.

Where prices are driven up further by strategic hoarding, prices do not reflect true demand and supply. There is a risk that inflated prices may encourage illegal activity, in the form of either the supply of fraudulent products or theft of products that are in short supply.

What should be done about it? In the context of emergencies, there may be merit in limiting price rises. Create substantial uncertainty for firms about what prices are allowed in the absence of a well-defined price cap.

This might occur especially if the costs facing firms are also changing, thereby creating a legal risk that the firms might inadvertently breach the rules.

Damage incentives to innovate and invest if the regulated prices are set too low. In the current emergency, regulation that limited price increases could mean, for example, that suppliers are less willing to incur the costs of repackaging and the logistics required to move stocks between distribution chains to reflect the shift in consumer needs. Lead to supplies of products that can be sold in international markets being re-channelled towards countries with higher prices.

To give legal certainty to firms, and also to allow speedy and low-cost enforcement, the test for price gouging would need to be relatively clear-cut. Fortunately, given the specific, and short-term, nature of emergency price gouging, this may be more straightforward than when assessing longer-term excessive pricing.

The fact that any rules would apply only over the short term will limit the risk of reduced incentives for long-run investment and innovation. Allowing firms to put forward a cost-based justification for their price rises would also help to reduce the risk to short -term investment: it should give firms confidence to incur additional costs where this is necessary to expand supply. Finally, limiting the scope of the prohibition in particular to essential products would allow it to be targeted at the most serious areas of concern, while creating minimal legal uncertainty and distortions to incentives beyond this.

What next? A similar relationship exists between price and demand. When the demand for the good increases, the price of the good also increases. When the demand decreases, the price of the good falls with it. But what about the price of essential items during a time of crisis? Does the booming demand always justify the increased rates?

Price gouging occurs when companies raise prices to unfair levels. For example, EpiPen costs and Uber price surges are both examples of price increases that have been considered unfair. In times like these, the demand for non-essential items and luxuries dwindles, leading many businesses to lose the sales they normally rely on. To offset this loss, retailers might raise the prices of essential items in an effort to stay in business. On the other hand, when the demand for essential items or services suddenly increases, the supply can quickly become very limited, further increasing prices.

To help limit the spread of the virus, governments are urging people to practice social distancing and self-isolation. An unintended consequence is a shortage of essential supplies—like hand sanitizer and disinfectants—due to the rush of people preparing to stay home for the foreseeable future. As a result, there have been reports of price gouging for such items. The phenomenon is not new or uncommon. Stories of price gouging in Florida after Hurricane Matthew made headlines in when prices for gas, hotels, water, and other essentials skyrocketed during a declared state of emergency.

The same issue arose in Texas following Hurricane Harvey in When demand reaches such high levels, it can be hard to tell the difference between supply and demand and price gouging. Policymakers and business professionals have historically had mixed opinions on whether businesses should raise prices during a crisis for this reason.

Price increases due to natural disasters are a classic example of price gouging, and the government will usually intervene and directly prevent companies from doing so. But there can be unintended consequences to such market interventions, which explains the ongoing debate among economists and policymakers regarding the proper response to natural disasters and price gouging. For business owners, deciding how to adjust prices during a time of crisis is both a practical and moral question.

If you have questions regarding price gouging or a retailer's practices, please contact your local law enforcement or the office of the attorney general. Code Ann. A No supplier shall commit an unconscionable act or practice in connection with a consumer transaction. Such an unconscionable act or practice by a supplier violates this section whether it occurs before, during, or after the transaction.

B In determining whether an act or practice is unconscionable, the following circumstances shall be taken into consideration:. Heather Morton is a program principal in Fiscal Affairs. She covers financial services, alcohol production and sales, telecommunications and medical malpractice issues for NCSL.