Is Optimal Pricing During an Emergency Unethical?

March 28, 2011

Most states across the country have price gouging laws.  In California for example, the price gouging law prohibits charging a price more than 10 percent higher than the price charged prior to a declared state of emergency for items in particular demand in postemergency situations.  Laws proscribing price gouging intend to enforce a moral view that says it is wrong to take advantage of another's pain for one's own gain.  The intention may be laudable, but the results of the laws clearly are not.  Merchants and consumers would be better off without price gouging laws, says Michael Giberson, an instructor with the Center for Energy Commerce in the Rawls College of Business at Texas Tech University.

A sustained examination of the ethics of price gouging finds the moral case against price gouging to be weak.  When the consequences of antigouging regulations are considered instead of just the intentions of their advocates, moral considerations likely weigh against, rather than for, price gouging law.

  • Straightforward economic analyses conclude that a nationwide price gouging law would exacerbate the effects of natural disasters and tend to concentrate the harm in the locations most directly hit by the disasters.
  • Alternatively, to frame this point differently, in the absence of price gouging laws, the natural workings of the price system would be to reduce the overall harm resulting from a disaster and share the harm remaining across a larger part of the population.
  • Because price gouging laws interfere with price signals, resources from outside of the disaster-affected area are not so readily mobilized.
  • Rather than promoting a shared sacrifice in response to a disaster, economic damage tends to be more localized.
  • A further result of interfering with price signals is that fewer resources get to where they are most needed, and therefore the common good is harmed rather than promoted.

Source: Michael Giberson, "The Problem with Price Gouging Laws," Regulation Magazine, Spring 2011.

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