With the recent hurricane disasters in Texas and Florida, price gouging — the sudden rise in prices of essential goods — has been the subject of heated debate. In the September 14 edition, UDK columnist Aroog Khaliq argued that “price gouging is a question of business ethics, not economic theory.”
Khaliq is right to question the ethical choices of businesses during a time of crisis. Undoubtedly, there are some who take advantage of a crisis by exploiting desperate people for profit.
On the other hand, disasters like hurricanes Harvey and Irma become serious economic crises very quickly. The underlying factor in price gouging is a surge in demand that often leaves shelves empty, and this results in higher prices by the law of supply and demand.
It seems perfectly reasonable that we would enact policies to prevent price gouging that harms desperate people, but in economics, the answer is often counter-intuitive.
Columnist Aroog Khaliq argues that price gouging during natural disasters and in remote areas is unethical and that the government should protect consumers from such practices.
Price controls to prevent gouging are well intentioned, but they often have negative effects. For one, rising prices work as a signal to suppliers of where goods are urgently needed. By using price controls, governments remove these important signals that help determine where resources are needed.
Also removed is the incentive for entrepreneurs to bring goods to the afflicted areas. Of course, government disaster relief and private charity take the primary roles in providing relief, but businesses can also play a role in eradicating shortages.
Most importantly, price controls don’t resolve the problem of shortages. Under these policies, the same amount of people will go without essential products anyway, without market mechanisms that aim to meet demand.
We absolutely should respond altruistically to crises like Harvey and Irma, but questions of economics should be answered with dispassionate analysis. We should consider the possibility that suppressing price gouging could harm the very people we aim to protect.
—Jake Roatch is a senior from Overland Park studying economics.