Here’s a letter to a new correspondent who is skeptical of my and other economists’ opposition to government prohibitions on so-called “price-gouging”:
Mr. Michaelson:
Thanks for your e-mail.
While you recognize the “downsides to outlawing price gouging,” you “continue to support it because at least it keeps critical goods affordable for poor people.”
Possibly. One can imagine the poorest people being the first to arrive at stores and finding there, available for sale at prices kept artificially low by statute, all the supplies that they wish to buy. That is, one can imagine that those who suffer the ill-consequences of shortages created by prohibitions on “price-gouging” – those who, because of shortages, are unable to buy supplies – are exclusively rich people.
But any such imagining is highly unrealistic.
Prohibitions on “price-gouging” keep the monetary prices of goods artificially low, but they do not keep the market values of goods low. (In fact, by discouraging suppliers from bringing more goods to market, these prohibitions cause these values to rise.) One consequence of monetary prices being kept lower than the prices that buyers are willing and allowed to pay is that ‘currencies’ other than money come to be used by buyers as means of acquiring goods.
‘Currencies’ such as family, business, social, and political connections attain greater importance when prohibitions on “price-gouging” create shortages. The wealthy family that would have competed to buy propane by offering to pay unusually high money prices will, because money prices aren’t allowed to rise, instead ‘buy’ propane by cashing in on its country-club connection with the store owner or its pull with the mayor.
By reducing the importance of money – and thereby elevating the importance of personal connections, political pull, and social status – as means of acquiring goods and services that are in short supply, prohibitions on “price-gouging” likely make poor people even worse off.
Getting enough money to buy goods selling at premium prices might not be easy for lower-income people, but I’m pretty sure that doing so is generally less difficult than getting – especially during times of crisis – the much less widely available and much more expensive personal connections, political pull, and social status.
Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030
