Price gouging
Encyclopedia
Price gouging is a pejorative term referring to a situation in which a seller prices goods
or commodities much higher than is considered reasonable or fair. In precise, legal usage, it is the name of a crime that applies in some of the United States
during civil emergencies. In less precise usage, it can refer either to prices obtained by practices inconsistent with a competitive free market
, or to windfall profits. In the Soviet Union
, it was simply included under the single definition of speculation
.
The term is similar to profiteering but can 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 jurisdictions where there is no such crime, the term may still be used to pressure firms to refrain from such behavior.
The term is not in widespread use in mainstream 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 a competitive environment. Alternatively, it may refer to suppliers' benefiting to excess from a short-term change in the demand curve
.
As a criminal offense, Florida
's law is typical. Price gouging may be charged when a supplier of essential goods or services sharply raises the prices asked in anticipation of or during a civil emergency, or when it cancels or dishonors contracts in order to take advantage of an increase in prices related to such an emergency. The model case is a retailer who increases the price of existing stocks of milk and bread when a hurricane is imminent. It is a defense to show that the price increase mostly reflects increased costs, such as running an emergency generator, or hazard pay for workers.
to preserve order during an emergency, and may be combined with anti-hoarding
measures. Exceptions are prescribed 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, Florida determined that one-third of complaints were unfounded, and a large fraction of the remainder were handled by consent decree
s, rather than prosecution. Proponents of laws against price gouging assert that it can create an unrealistic psychological demand that can drive a non-replenishable item into extinction.
and Walter E. 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. For example, after a storm has felled numerous trees in a locality, a rise in the price of chain saws will discourage their purchase by people with only a minor need for them, making them more available for those with the strongest need. Problems during the 1870 Siege of Paris
, which critics attribute to price restrictions, are often held up as another example.
Those economists, in effect, reject the colloquial use of 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.
Goods
Goods may refer to;*Good , physical product*Personal property, legal personal chattels...
or commodities much higher than is considered reasonable or fair. In precise, legal usage, it is the name of a crime that applies in some of the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
during civil emergencies. In less precise usage, it can refer either to prices obtained by practices inconsistent with a competitive free market
Free market
A free market is a competitive market where prices are determined by supply and demand. However, the term is also commonly used for markets in which economic intervention and regulation by the state is limited to tax collection, and enforcement of private ownership and contracts...
, or to windfall profits. In the Soviet Union
Soviet Union
The Soviet Union , officially the Union of Soviet Socialist Republics , was a constitutionally socialist state that existed in Eurasia between 1922 and 1991....
, it was simply included under the single definition of speculation
Speculation
In finance, speculation is a financial action that does not promise safety of the initial investment along with the return on the principal sum...
.
The term is similar to profiteering but can 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 jurisdictions where there is no such crime, the term may still be used to pressure firms to refrain from such behavior.
The term is not in widespread use in mainstream economic theory
Mainstream economics
Mainstream economics is a loose term used to refer to widely-accepted economics as taught in prominent universities and in contrast to heterodox economics...
, but is sometimes used to refer to practices of a coercive monopoly
Coercive monopoly
In economics and business ethics, a coercive monopoly is a business concern that prohibits competitors from entering the field, with the natural result being that the firm is able to make pricing and production decisions independent of competitive forces...
which raises prices above the market rate that would otherwise prevail in a competitive environment. Alternatively, it may refer to suppliers' benefiting to excess from a short-term change in the demand curve
Demand curve
In economics, the demand curve is the graph depicting the relationship between the price of a certain commodity, and the amount of it that consumers are willing and able to purchase at that given price. It is a graphic representation of a demand schedule...
.
As a criminal offense, Florida
Florida
Florida is a state in the southeastern United States, located on the nation's Atlantic and Gulf coasts. It is bordered to the west by the Gulf of Mexico, to the north by Alabama and Georgia and to the east by the Atlantic Ocean. With a population of 18,801,310 as measured by the 2010 census, it...
's law is typical. Price gouging may be charged when a supplier of essential goods or services sharply raises the prices asked in anticipation of or during a civil emergency, or when it cancels or dishonors contracts in order to take advantage of an increase in prices related to such an emergency. The model case is a retailer who increases the price of existing stocks of milk and bread when a hurricane is imminent. It is a defense to show that the price increase mostly reflects increased costs, such as running an emergency generator, or hazard pay for workers.
Laws against price gouging
In the United States, laws against price gouging have been held constitutional as a valid exercise of the police powerPolice power
In United States constitutional law, police power is the capacity of the states to regulate behavior and enforce order within their territory for the betterment of the general welfare, morals, health, and safety of their inhabitants...
to preserve order during an emergency, and may be combined with anti-hoarding
Hoarding
Hoarding or caching is a general term for a behavior that leads people or animals to accumulate food or other items in anticipation of future need or scarcity.-Animal behavior:...
measures. Exceptions are prescribed 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, Florida determined that one-third of complaints were unfounded, and a large fraction of the remainder were handled by consent decree
Consent decree
A consent decree is a final, binding judicial decree or judgment memorializing a voluntary agreement between parties to a suit in return for withdrawal of a criminal charge or an end to a civil litigation...
s, rather than prosecution. Proponents of laws against price gouging assert that it can create an unrealistic psychological demand that can drive a non-replenishable item into extinction.
Opposition to laws against price gouging
Economists Thomas SowellThomas Sowell
Thomas Sowell is an American economist, social theorist, political philosopher, and author. A National Humanities Medal winner, he advocates laissez-faire economics and writes from a libertarian perspective...
and Walter E. Williams
Walter E. Williams
Walter E. Williams, is an American economist, commentator, and academic. He is the John M. Olin Distinguished Professor of Economics at George Mason University, as well as a syndicated columnist and author known for his libertarian views.- Early life and education :Williams family during childhood...
, 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. For example, after a storm has felled numerous trees in a locality, a rise in the price of chain saws will discourage their purchase by people with only a minor need for them, making them more available for those with the strongest need. Problems during the 1870 Siege of Paris
Siege of Paris
The Siege of Paris, lasting from September 19, 1870 – January 28, 1871, and the consequent capture of the city by Prussian forces led to French defeat in the Franco-Prussian War and the establishment of the German Empire as well as the Paris Commune....
, which critics attribute to price restrictions, are often held up as another example.
Those economists, in effect, reject the colloquial use of 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.
See also
- ExtortionExtortionExtortion is a criminal offence which occurs when a person unlawfully obtains either money, property or services from a person, entity, or institution, through coercion. Refraining from doing harm is sometimes euphemistically called protection. Extortion is commonly practiced by organized crime...
- Just priceJust priceThe just price is a theory of ethics in economics that attempts to set standards of fairness in transactions. With intellectual roots in ancient Greek philosophy, it was advanced by Thomas Aquinas based on an argument against usury, which in his time referred to the making of any rate of interest...
- MonopolyMonopolyA monopoly exists when a specific person or enterprise is the only supplier of a particular commodity...
- Price fixingPrice fixingPrice fixing is an agreement between participants on the same side in a market to buy or sell a product, service, or commodity only at a fixed price, or maintain the market conditions such that the price is maintained at a given level by controlling supply and demand...
- Sherman Antitrust ActSherman Antitrust ActThe Sherman Antitrust Act requires the United States federal government to investigate and pursue trusts, companies, and organizations suspected of violating the Act. It was the first Federal statute to limit cartels and monopolies, and today still forms the basis for most antitrust litigation by...
External links
- The Ethics of Price Gouging, Matt Zwolinski, Business Ethics Quarterly, vol. 18, no. 3 (July, 2008)
- Florida Attorney General FAQ Concerning Price Gouging
- Condemning Price Gouging with Respect to Motor Fuels Following Terrorist Acts of September 11, 2001 in the Congressional Record
- The Non-Crime of Price Gouging A criticism of laws against price gouging
- The Benefits of Price Gouging A defense of price gouging from an objectivist perspective
- Let ’Em Gouge: A Defense of Price Gouging by Jerry Taylor & Peter VanDoren
- Gas Gouging Rebuttal: An Essay Challenging the Claim of Price Gouging by Robert Rapier
- Account of the failed ambient temperature-based pricing of soda.
- There's Some Good in Gouging by Karen Selick, from The Globe and Mail
- Munger on Price Gouging podcast of discussion between economists Mike Munger and Russ Roberts on the effects of price gouging