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More on So-Called “Price Gouging”

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Peter Calcagno has a nice post over at EconLog titled “Price Signals, Price Gouging, and Philanthropy [2].” I encourage you to read it.

A commenter on Pete’s post, Phil H, registered a mild objection. Here’s my (slightly edited) reply to Phil H, posted in the comments section of Pete’s post:

Phil H: I think it incorrect to write, as you do, that:

price gouging should be impossible when there are well-functioning markets; the existence of gouging demonstrates that the market has (temporarily) failed to clear.

Higher prices are evidence that markets are indeed well-functioning. We observe so-called “price gouging” when supplies fall relative to demands – and, typically, when this outcome is caused by a decrease in supply simultaneous with an increase in demand. When supplies fall relative to demands, prices should rise. Evidence of a poorly functioning market under such circumstances would be the absence of price increases.

Nothing in the concept of a well-functioning market requires that supply increase instantaneously – or even ‘quickly’ – to offset any increase in demand such that price is maintained at its ‘normal’ level.

Put differently, because nothing in the concept of “well-functioning market” assumes or requires that supply and demand always intersect each other at some given and long-standing price – because nothing in the concept of “well-functioning market” remotely is at odds with supply and demand shifting relative to each other such that the price at which today quantity demanded equals quantity supplied differs from what that price was yesterday – nothing about so-called “price gouging” is evidence of a poorly functioning market. Indeed, a central part of the notion of “well-functioning market” is prices moving up or down as quickly and as far as possible to clear markets.

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