As the coronavirus pandemic sweeps across the country, things are growing more volatile and increasingly uncertain by the day. Even as I sit here writing from the comfort of my government-recommended social-isolation at home, we’re all feeling the effects of this virus. Things are likely going to get worse before they get better. But perhaps more concerning than the actual virus itself are its economic effects. The stock market has plummeted dramatically, and people’s investments and retirement funds could be at risk if the trend continues. And now, as people hunker down and prepare for the possibility of a mandatory quarantine, another economic issue has risen to prominence: price gouging.
This practice can simply be defined as “when a seller increases the prices of goods, services or commodities to a level much higher than is considered reasonable or fair and is considered exploitative.” Every time a long-term crisis strikes, discussion of the rules and regulations surrounding this practice return to the forefront. The amoral Free Market of pure capitalism clashes with the restrictions of government and the unwritten code of the social contract.
And so, for that reason, I’m here today to argue for why price gouging may not be as bad as you’ve been led to believe.
A Relevant Example
First, to put things in context, let me offer an example…
Matt Colvin, a 36-year-old former Air Force technical sergeant residing in Tennessee, has made a business selling products online, mostly through Amazon’s digital marketplace and other vendors like eBay.
As the coronavirus outbreak spread, Colvin managed to acquire 17,700 bottles of hand sanitizer, along with large quantities of sanitary wipes and other disinfectants. Within 24 hours, Colvin has sold 300 bottles on Amazon, with prices ranging from $7 to a staggering $70 per bottle. Then, in response, Amazon removed the listings and issued a warning to its vendors reminding them of the restrictions against price gouging.
Colvin found himself with a massive surplus of sanitizer and no way to get rid of it. He claims that, when he bought the products, he never anticipated the panic that would cause nearly every store to run out. Additionally, once word of his business plan came out, he began receiving criticism and death threats online. Ultimately, he made the decision to donate 60% of his stock to a local church, but his actions were sufficient to cause Amazon and eBay to ban him, and the Tennessee Attorney General launched a price-gouging investigation. (For the full details of the situation courtesy of the New York Times, CLICK HERE.)
This situation perfectly exemplifies the controversy surrounding the practice of price gouging. Allow me to offer a word in Colvin’s defense.
Now, charging $70 for a bottle of hand sanitizer could be seen as wrong…but I’d argue that it’s not for the reason you think.
The $70 price tag is extreme, but if people were willing to pay it for access to a product that is in high demand, then it’s viable.
The limit on price inflation should be whatever the market will bear, not whatever arbitrary statute the government puts into place. Whether charging $70 was right or wrong should be determined by consumers, not by external government entities. The price becomes wrong when consumers are no longer willing to pay for it.
The government alleges that Colvin was acting unethically by taking the sanitizer from various stores and attempting to use them for personal profit. But were those products to have remained in the store, wouldn’t they have been sold for a profit anyway? It just would’ve been the store profiting from it rather than an individual seller. Unless the government mandates that all stores sell sanitizer and related products at cost directly from the manufacturer, then there’s still profit being made from a germ-related panic.
The Generator Dilemma
Here’s another example, this one hypothetical:
Here in the state of Florida, home of FreedomWire HQ, we’re no strangers to hurricanes. A major storm rolls around every few years, and sometimes, in the aftermath, people are left without power for days or weeks at a time.
This means that every time a hurricane is approaching, generators and fuel become hot commodities. Usually, this results in local stores selling out within a few days. Anyone who missed the chance to buy one during the rush or failed to buy one months in advance is typically out of luck.
So, for the sake of the argument, say a severe storm has just ravaged the state of Florida. Power in the affected area has been completely knocked out, and a run on the stores has essentially set the number of available generators to zero.
A high demand with limited supply has led to a local shortage.
Now, say that someone in Georgia, just one state over, takes note of the situation and sees an opportunity. After all, Georgia stores haven’t been affected by the shortage, so the number of available generators is unchanged.
A high supply with limited demand has created a surplus.
Currently, a middle-of-the-line generator will run you roughly $450-$500, with cheaper or more expensive models available varying based on wattage, portability, or other factors.
Say this Georgia resident decides to go rent a truck, swing by the local hardware store, load up with as many generators as he can afford, and then transport them down to Florida to sell. Seeing the opportunity and wanting to make the venture as profitable as possible, he might decide to charge $700, $800, maybe even upwards of $900 per unit…and people without access to electricity may very well be willing to pay.
Identifying and filling needs by supplying products or services is the entire point of business in the first place…
But according to the government, because of the circumstances, this is completely illegal.
In 1992, after the devastation of Hurricane Andrew, the state’s Attorney General instituted a policy preventing sellers from providing necessary goods at prices that are unfairly burdensome.
According to the statute: “If there is a ‘gross disparity’ between the prior price and the current charge, it is considered price gouging. It is not considered price gouging if the seller can justify the current price by showing an increase in the price of their supplies or market trends. Additionally, the price gouging statute does not apply to non-essential luxury goods like alcoholic beverages and cigarettes.”
Just like with Colvin’s case, the government steps in and prevents the seller from marking up prices beyond a certain arbitrarily-decided amount (usually about 10%, although the standard isn’t strictly determined).
And just like in Colvin’s case, this legislation hurts the very customers it’s supposed to help.
Price Gouging Is All About Supply And Demand
When the government inserts itself into situations like these, they are essentially limiting the amount of profit an individual can make by supplying goods.
Colvin found himself with a massive stockpile that he had already paid for but couldn’t sell. Our Georgia resident has a truckload of generators that he similarly can’t get rid of.
The government claims that, by preventing these people from setting their own prices, they’re protecting people from predatory sales tactics…and in certain scenarios, that’s true. But the much bigger effect here is that the government is preventing people in need from accessing these goods at all.
Colvin’s situation is unique in that he was able to donate his resources to a charitable group, but that’s hardly the case across the board. Is the man from Georgia expected to just give away every generator free of charge? Are business owners supposed to just hand out their highly-demanded products just because there’s an ongoing crisis?
Rather than being an abject evil like the government would have you believe, creating unfair conditions for people in need, the profit incentive is what drives suppliers to make these high-demand products available in the first place!
Ordinarily, there’s no logical reason to take a truckload of generators across state lines, because the market for them hasn’t changed. But the opportunity for higher profits incentivizes sellers to redistribute goods from areas of surplus to areas of shortage, while also supporting themselves in the process.
Taking the charity option out of the equation, if Colvin can’t sell his sanitizer, then people are never able to access it when they need it. If the Georgia resident can’t make enough money to offset generator purchases, truck rental, and travel costs, then he’ll never make the trip and the number of available generators in the affected area remains at zero.
In both cases, the legislation causes more suffering than the monetary cost.
But What About Morality and Ethics?
Now, I’ll address the logical counter-argument to the point I’m trying to make.
Whenever the subject is discussed, it’s always argued that it’s immoral and unethical to drive up costs for personal profit just because you have desperate people “bent over a barrel,” so to speak.
Don’t get me wrong here: I’m NOT trying to say that price gouging during a crisis is moral behavior.
Rather, I’m saying that, from a big-picture perspective of business, morality shouldn’t factor into the decision in the first place.
Beyond that, I’m also saying that the government’s systemic control of prices during times of emergency isn’t the solution.
Where vagueness in legislation exists, government overreach will take root—and the legislation around price gouging is VERY vague.
What I’m arguing is that the TRUE limitation on predatory business practices like price gouging should come via social response, not government intervention.
The guy who charges his neighbors exorbitant prices for necessary goods during a crisis isn’t likely to get an invitation to the next neighborhood barbeque. In fact, he’ll likely bear the brunt of people’s frustration once the situation blows over.
And that’s exactly my point. The social fallout of his decisions—loss of friendships, ostracization, and scorn from the general public—will in many cases be enough to ensure that he charges a fair price and isn’t overly-burdensome with how he conducts his business.
He makes a profit to compensate for higher demand, the people around him get access to much-needed goods, and, best of all…
The government has nothing to do with it.
But that’s just my take on the subject.
This has been and remains a hotly-debated issue, so please, feel free to share your thoughts and opinions in the comments section below.