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What is Price Gouging?
Price gouging refers to when a seller hikes up the price of its products, services, or any other commodity beyond a degree that many consider fair or reasonable. It can occur as a result of collusion between supposed market rivals, fixing prices to perhaps boost profits, or secure a monopoly or oligopoly on a commodity.
Price gouging typically happens suddenly, after a demand or supply shock. That’s why you often hear about the price hikes of essential goods (e.g. food, clothing, shelter, medicine, etc.) in the aftermath of natural disasters. For a recent example (as of March 2021) of alleged price gouging, you can look at the jump in price for hand sanitizer during the Coronavirus pandemic. Some people tried to sell a $7 bottle of hand sanitizer for $150.
The graph shows how the market price for essential goods experiences a huge boost due to the increase in demand. Source: Economics Help
The term has three different usages: to refer to (1) a specific criminal offence, (2) prices inconsistent with those of a competitive market, or (3) windfall profits. As you can probably tell, whichever way you use the term, price gouging has a distinctly negative definition and connotation. Many consider the practice exploitative and unethical, particularly as it pertains to the pricing of essential goods during a crisis.
The Zero Theft Movement, along with our growing community, is working to rid the rigged parts of the U.S. economy so the ethical parts can thrive for both the public and businesses. Price gouging might be one way the economy gets rigged, but before you make that call, you should inform yourself first.
For FY 2017, U.S. citizens paid around 88.9% or $4,443 billion of the nation’s total taxes. Corporate taxes amounted to about 7.2% or $349 billion. We calculated those figures using data provided by USA Facts.
Price Gouging as a Crime
While the federal government has not established price-gouging statutes, 36 states have enacted laws against price gouging. For many of these 36 states, price-gouging statutes cover only periods of crisis or emergency.
While the rest of the states do not have a specific anti-price gouging statute, they still can provide some protections under consumer protection laws.
States colored yellow have anti-price gouging laws, those colored gray do not
Image source: Fox News 13 via Yahoo! News
Matt Zwolinski, a professor at San Diego University of Law, claims an increase in price must satisfy the following three general criteria to violate price-gouging statutes:
- Period of emergency: The majority of anti-price gouging laws cover only price shifts during a declared state of emergency or disaster.
- Essential goods: Most laws apply exclusively to necessary goods and services (e.g. food, water, rent, etc.)
- Price ceilings: Laws set a cap on the maximum price that can be charged for given goods.
Again, keep in mind that laws differ from state to state. What constitutes a violation of price-gouging law in one state will not necessarily apply to another state. For example, under California state law (Cal. Penal Code § 396(b)), sellers cannot increase prices for essential goods and services by more than 10% immediately prior to the declaration or proclamation of emergency.
Causes of Price Gouging
Three main causes of price gouging exist:
Price gouging can occur when the supply of a commodity has taken a hit while demand remains relatively constant. A supply shock happens when a disaster or event affects a specific location but harms the wider economy.
To use a particularly tragic example, the 2011 Tōhoku earthquake and tsunami caused suffering beyond belief. Survivors, considering the profound damages, experienced a high demand for essential goods but a low supply. They had to deal with price gouging due to a combination of supply shocks and over-demand.
Japanese automobile manufacturers such as Toyota had factories set up in the impacted area. They dealt with major problems in their supply chains—loss of employees causing major damage, of course. Due to the impacted supply chain, companies raised prices by 6%.
On a purely economic (not emotional level), international consumers did not have to go through the ordeal of the earthquake and tsunami. They had little economic reason to panic or suddenly develop a desire for Japanese-made cars. The supply, nonetheless, dips; and the price got raised.
Over-demand tends to occur when there’s sudden mass panic and perhaps the genuine need for a product or service. We can return to the example of the COVID-19 outbreak to see how price gouging can occur due to a spike in demand.
Whether people genuinely needed to or not, people started to panic about buying toilet paper, hand sanitizer, diapers, and other essentials. The fear they would not have enough of what they needed, perhaps, drove them to buy these items en masse.
Until supply catches up with demand, sellers might take advantage of the situation by jacking up prices. Some small businesses and individuals capitalized on this ‘opportunity,’ selling or re-selling goods at a significantly marked up rate.
AP News reported, “One store advertised hand sanitizer at $60 a bottle. Another was accused of hawking it at $1 a squirt. Chain stores offered $26 thermometers and face masks at the “everyday low price” of $39.95 a pair, while a convenience store touted toilet paper at $10 a roll next to a sign reading: “This is not a joke.”
Actually, if the big box sellers had set the prices higher before others later did, it likely would have deterred at least some of the questionable hoarding and re-selling. The high(er) price tag would have forced many to remain more economical when purchasing those essential goods. This in turn would not have created supply shortages.
While price gouging typically occurs in the wake of a natural disaster, many have used the term to refer to cases where multinational corporations have raised their prices to an arguably unethical level. They can do so without significantly hurting business because they might have considerable, if not near-complete, control over a market.
One prominent case of the above first emerged when the price of Mylan’s EpiPen came under fire. EpiPen is an auto-injector that administers epinephrine, a life-saving medication that treats anaphylaxis (i.e. severe, potentially fatal allergic reaction). Mylan specifically created and patented the auto-injector, which led to the company increasing the price of Epipen multiplied times over ($108 in 2007 to $608 in 2016, for a two-pack).
According to a Department of Justice press release, “Pharmaceutical companies Mylan Inc. and Mylan Specialty L.P. [agreed] to pay $465 million to resolve claims that they violated the False Claims Act by knowingly misclassifying EpiPen as a generic drug to avoid paying rebates owed primarily to Medicaid…”
Due to the non-interference clause in Medicare Part D, the government cannot negotiate drug prices. Does this lead to much more taxpayer money being spent on drugs than necessary? See what the ZT community has found through their investigations…
The Price Gouging DebateIn reality, price gouging may not prove such a cut and dry issue. Consider the many small business owners who have suffered during the pandemic. Raising prices on high-demand goods likely helped some mom and pops shops recoup the losses due to quarantine. On the other hand, many probably wondered whether raising prices on essential items was completely ethical.
|Arguments for price gouging||Arguments against price gouging|
|Just a natural part of market-based economies|
Capitalizing on a sudden surge in demand is good practice economically speaking. Suppliers will eventually meet the demand, and the price in turn lowers as a result.
| Promotes ‘rent-seeking’ or inefficient economic behavior|
Instead of improving, innovating, or contributing to the economy, price gouging can lead to businesses and individuals behaving in an economically unproductive manner. Rather than adding supply, they are making a profit off of scarce resources. Furthermore, consumers may also have additional time costs trying to find a seller.
|High prices weed out those who don’t really need the item|
High prices can ration demand to those who want or need a product or service the most. Those willing to pay the marked up price show that they truly want or need the item in question.
|Ability to purchase does not equate to level of need |
Those with less means need essential items just as much as the next person, especially during times of crisis. Price gouging can limit their access to basic necessities. One’s purchasing power does not accurately reflect one’s needs.
|Incentive to increase supply|
Price gouging could incentivize sellers to further invest in ramping up production and/or expanding their areas of operation. Prices that remain as they were may not provide enough economic incentive to get sellers to service areas with people in need.
|Honoring the social contract|
Price gouging can encourage a ‘survival of the fittest’ mindset. Rather than working together to make sure as many people get through a crisis, individuals might look out only for themselves by panic-buying and hoarding.
|Allocatively inefficient |
Anti-price gouging laws prohibit companies from setting and charging prices based on consumer preferences. Those who don’t even need hand sanitizer, for example, might buy more just because they can afford it and might need it very far in the future.
|Humans over profit|
Profit should not be the main priority. One’s fellow citizens should be. Capitalizing on people’s fears and medical needs can feel not only unfair but also unethical. Hoarding and price gouging, at the very least, often provokes the disapproval and even outrage of the public.
Price gouging encourages companies to build enough stock before an emergency or crisis occurs. The prospect of selling essential goods at higher prices could provide enough incentive for sellers to have ample supplies already prepared.
Individuals should also be better prepared themselves, otherwise they would not need to panic buy.
|Hard to predict |
Before the pandemic, nobody could predict that such a thing would happen at that exact time. Therefore, the ability to price gouge would not make any difference to stock-piling.
In times of crisis, the government should provide financial support to deal with shortages. It can purchase a huge supply and distribute the essential goods (hopefully) in an equitable way.
What do YOU think about Price Gouging?
Price gouging remains a hotly contested topic, which was stoked further when the pandemic hit. After reading the cases presented by both sides, what do you think about price gouging? Should it be outlawed, regulated, or left alone?
We at the Zero Theft Movement, along with our growing community, strive to eradicate crony capitalism from the U.S. economy. On our voting platform, citizens author theft proposals, and the community decides whether that investigation has convincingly proven (1) theft is or isn’t occurring in a specific area of the economy, and (2) how much is being stolen or possibly saved. Through direct democracy, we can collectively decide where the problem areas are and start working on addressing them systematically.
The ZTM community knows that many businesses, including some corporations, act ethically. We are trying to hold the bad actors accountable. The corrupt corporations, lobbyists, and government officials. That way, good people and businesses can properly thrive and enjoy the piece of the piece they’re all due.
The Zero Theft Movement does not have any interest in partisan politics/competition or attacking/defending one side. We seek to eradicate theft from the U.S economy. In other words, how the wealthy and powerful rig the system to steal money from us, the everyday citizen. We need to collectively fight against crony capitalism in order for us to all profit from an ethical economy.
Terms like ‘steal,’ ‘theft,’ and ‘crime’ will frequently appear throughout the article. Zero Theft will NOT adhere strictly to the legal definitions of these terms (since congress sells out). We have broadly and openly defined terms like ‘steal’ and ‘theft’ to refer to the rigged economy and other debated unethical acts that can cause citizens to lose out on money they deserve to keep.