Stephen Carter On Why “Price Gouging” Actually Helps

Sold-Out Coronavirus N95 Face Masks Offer a Lesson in Price Gouging: The best way to make sure supply meets demand is to let sellers charge higher prices.

Let’s begin with a thought experiment: Suppose that an entrepreneur — we’ll call him Carter — turns out to have stockpiled several thousand N95 masks a few years ago. Now, noticing the shortage, Carter opens up his storehouse and announces that he will sell N95s, in lots of 20 (as they’re commonly purchased), to the highest bidder. He even sets up a website where people can bid. Every ten minutes, until the supply is gone, the highest bidder wins 20 masks. Bids quickly run into the thousands of dollars for a package that, before the panic, could often be had for less than twenty bucks.

What happens next is of course predictable.

The outraged news media declares a scandal, the outraged Twitterverse tries to cancel poor Carter, and the outraged politicians stumble all over each other on their way to the nearest camera to charge him with price-gouging. Carter is hauled before the country as an example of how not to behave in a crisis. Greed run rampant. An immoral effort to profit from people’s fear.

You can write the script.

Carter caves. Humiliated, and worried about his business prospects, he donates his entire store of N95 masks to public health authorities, who in turn will give them out if deemed necessary (that is, if deemed necessary in their view) according to some rationing formula that will be shared with the public only if what the authorities deem to be an emergency should arise. (In China, masks are already being rationed by the government.)

But this is a dreadful result.

Here’s the simplest reason: Smarter, who happens to possess an even bigger cache of N95 masks than Carter did, will observe how he was treated and decide to keep hers under lock and key. After all, she might need them in an emergency. As a result of the insistence that Carter not sell his property at the price the market is willing to pay, the supply of N95 masks to the public is smaller than if nobody had intervened.

College students learn in Economics 101 that a demand curve slopes downward to the right. As demand falls, price falls. As demand rises, price rises. If instead you don’t allow the price to rise — because of your concern about “price gouging” — the quantity offered for sale will fall.

This isn’t complicated, and it’s true in every disaster. I’m willing to pay a lot more for a generator when I know the power is going to be out for a week than I am when the lights are on. If the price is unregulated, the difference in what I would pay in those two situations will bring more generators to market. And depending on the cost to enter the market, the rising price will lead more sellers to bring generators to the disaster site, leading to a larger supply, and eventually a lower price.

This should be obvious, but isn’t.

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h/t GR