On the Ethics of Price Gouging

Opportunistic people are buying hoards of hand sanitizer, cleaning wipes, soap, and toilet paper with the intent to sell them at a profit on Facebook Marketplace, Kijiji, and Amazon. Most people feel that this is wrong. BC’s Premier John Horgan said, for example, that “I’m profoundly disappointed with people buying and hoarding, then re-selling online. I think that’s just offensive and most people would bristle on that.” I, on the other hand, am much more conflicted about this. So in this essay, I’ll try and flesh out the two sides to this issue and then see if I can resolve the tension between them.

Let’s start with the unpopular perspective: price gouging is good.

One reason is because prices are the sum total of information that comes from all areas of the market. If prices go up really high, then it also allocates the goods to the locations where they are most needed. Does someone in Kelowna, for example, need hand sanitizer as much as the person in Milan? The risk of getting infected is much higher in Milan than in Kelowna, and thus, people need more protection in Milan than in Kelowna. The Milanese demand hand sanitizer much more, and thus are willing to pay more for it. By buying a boat load of hand sanitizer and then selling it for a profit on Amazon, entrepreneurs redistribute sanitizer to the places where it is wanted the most. If soap and hand sanitizer are wanted in Milan, then the price of those goods will increase there, leading entrepreneurs to try and profit from this price discrepancy by buying cheap and selling where it’s more expensive. It is better for people who want a good to have it, and a higher price indicates that people in one place want it more than the people in another place, where the price is lower. Price gouging is an effective means of transporting highly desired goods from one place to another, and so therefore, it is good.

Secondly, price gouging is good because it incentivizes the market to produce more of the good demanded. Toilet paper companies, hand sanitizer companies, all of these companies are working on overtime to supply the heightened demand. This demand is created by the panic buying of these goods, along with price gouging, like this guy who bought all of the hand sanitizer in his state. Why then do workers who make toilet paper and hand sanitizer go on to work overtime? I’m sure there’s at least a certain level of duty and honour they feel by continuing to work on these issues. But I doubt that they would continue to work if they were not getting paid for it. Companies who produce these goods by working overtime shifts get compensated for it. By not allowing the price of goods to rise with the increased demand, you take away the incentive of these companies to produce extra really quickly, thus making production really really sloooooow.

The third reason for why we should allow price gouging is because it can help counteract hoarding. A cool analysis retweeted by Steven Pinker showed that this toilet paper run is a lot like a bank run: people are not buying it because they need it, but because they fear other people will buy it all up, leading them to buy it up ‘first’. The solution to this, just like bank runs, is for the government to guarantee everyone one package of tp to everyone. When I went to SaveOnFoods yesterday, toilet paper was on sale! I think that this was the wrong price to have. In times like this, toilet paper should be made more expensive, such that when you reach for that next package, you really think about whether it’s worth the $20 that it is right now, or whether you can in fact actually wait for a couple of weeks until more toilet paper comes in. The same goes with canned foods as well – raising the price of it (instead of $1, make it $5, for eg) will reduce demand for each of the goods at the moment.

So, there are three reasons for why price gouging is good. It redistributes goods to where they are most wanted, it incentivizes companies to produce more of the demanded goods, and it helps to inhibit hoarding. All three of these things help to ensure that a scarce number of goods are distributed as widely as possible. Or so it goes according to theory.

The issue with these three arguments is that they’re just the application of dogmatic neo-classical economics to the real world. It’s not necessarily true. But more on this later. Next, I want to try and pin down a few arguments for why exactly it is wrong to price gouge.

First, hurting the poor is wrong, price gouging hurts the poor, therefore, price gouging is wrong. There are many people out there who are really really poor. On top of that are people who are really poor. And then there are the normal poor people. They cannot afford losing their job, they live from paycheck to paycheck. Things like this. By price gouging, you make buying normal and essential goods more expensive, taking up a bigger chunk of their income for no necessary reason. Only wealthy people can afford the raise in price, and the poor either have to choose between toilet paper or their next meal.

Second, hurting the most vulnerable is wrong, price gouging hurts the most vulnerable, therefore price gouging is wrong. The most vulnerable are the elderly, the poor, the immunocompromised.

Third, being greedy is wrong, price gouging is greedy, therefore it is wrong.

Fourth, profiting from fear and panic is wrong, price gouging is profiting from fear and panic, therefore it is wrong.

Here are some halfway solutions:

Older people and those with disabilities who ‘need’ the items can get a discount using their SaveOnFoods cards, which will also restrict people from buying multiple items.

Want ≠ need. Governments provide needs. Toilet paper isn’t really a need. You can use water, like the rest of the world does. Hand sanitizer? You can use soap. Masks? Use a handkerchief.

Published by efernandes

I blog now.

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