A feature of price gouging is that some firms and individuals who are able to get hold of scarce supplies gain a temporary monopoly power for selling that product. Because demand is very price inelastic, the firms with the supplies could in theory charge very high prices.
Price gouging may provide an incentive for a company to invest in increasing production or incurring transport costs and deliver the needed material to the areas in need. If prices have to stay at the average, firms may make a loss in selling basic necessities to areas of most need. Allocatively inefficient.
Libertarian economists, such as Thomas Sowell and Walter E. Williams have argued price gouging serves a useful purpose for allocating resources during a disaster. Encourage stockpiling.
In the UK, price gouging is regulated under the Competition Act 1998, which lists price gouging as an unfair business practise. There can be an element of uncertainty over some price increases, e.g. is price increase due to disruption in supply or is it due to abuse of monopoly position?
In times of emergency, it is vital that people feel ‘we are all in it together’ and there is some kind of social contract. Price gouging creates an atmosphere that it is the ‘survival of the fittest.’. This can make it difficult to maintain social order and prevent panic-buying and hoarding.
Price gouging can lead to inefficient displacement activity. For example, if individuals buy up stocks from shops and resell them, they are spending time and effort to distribute the goods at a higher price, but they are not increasing the number of scarce resources.
If prices have to stay at the average, firms may make a loss in selling basic necessities to areas of most need. Allocatively inefficient. Price gouging legislation prevents firms charging a price according to consumer preferences. If the price of face masks are kept low, people who don’t really need it may buy.
Many countries have laws against the practise of price gouging – to protect consumers against unfairly high prices during a national emergency.
If the price of chainsaws surges after a hurricane, it will mean that only those who desperately need it will buy – those who only need it for moderate needs, will wait. It can be self-selecting. Incentive to increase supply.
After the hurricane, there may be a surge in demand for electric saws to chop down trees or demand for temporary tents.
Some states may allow a 10% increase above past average prices. If supply is disrupted and the cost of selling the good rises, then passing the cost increase onto consumers does not count as price gouging. For example, if foreign imports of food are disrupted and domestic food is more expensive, a proportionate increase in prices would not be ...