Let the Market Work Its Magic

by Maggie Hroncich, age 17
Submitted by: Colleen Hroncich

Recently, the state of Florida activated the phone number 1-866-9NO-SCAM as an emergency hotline. No, it was not for victims of identity theft. It wasn’t for citizens harmed by credit card fraud. Nor was it for people affected by internet scams, human trafficking, suicide, or depression. If one called this number, they would reach the official Price Gouging Hotline.  

Indeed, in many states price gouging is a crime. During Hurricane Irma, violators were subject to fines of $1,000 per violation. Much of the public views price gouging as inherently evil. After all, at first glance what people see are greedy businessmen using a tragedy to make money.

However, to quote economist Fredrick Bastiat, we must consider “that which is seen, and that which is not seen”. If we examine the unseen effects of price gouging laws, it becomes clear these rules do anything but help disaster victims.

Understanding price gouging requires understanding basic economics – specifically, the incentive structure. Businesses are always trying to make as much money as possible. To do this, they must meet the needs of their consumers, who in turn are attempting to spend as little as possible. In a free market system, both parties can negotiate and walk away satisfied.

Additionally, we must consider the law of supply and demand. As supply contracts, prices increase; the resulting decrease in demand helps conserve scarce resources. The increased price signals other producers to enter the market.  The supply now expands, sending prices back down. Without government interference, consumers and producers can both prosper.

There are many good examples of the free market in action. A couple of years ago, there was a severe water crisis in my cousin’s town. The water treatment facility declared there was hazardous algae in the pipes and water supply. Not surprisingly, there was a rush – almost a stampede - for bottled water. No price gouging laws of any form were enacted, so the price of water went up, reflecting the urgency of the situation.

Far from harming people, this helped them by encouraging conservation. Since the price was higher, most individuals only bought what was absolutely necessary instead of hoarding. There was more water to go around for everyone. Furthermore, the price didn’t stay high for long – because “evil” entrepreneurs went to neighboring cities to stock up on bottled water to sell. As supplies flooded into the town, prices went down. Had price gouging laws been enacted, the initial supply of water would have run out more quickly. Exacerbating the situation, entrepreneurs would lack incentive to bring more supply in because they wouldn’t make a profit. Lack of price controls allowed the market to run its course, and further calamity was averted.

Unfortunately, lawmakers do not always adopt a laissez-faire attitude in times of trouble. Rewind to the oil crisis in the 1970s, which I recently learned about in my government class. Price controls were imposed; as a result prices did not reflect the scarcity of gas. Consumers waited in long lines (ironically, wasting fuel in the process) only to find out the station was out of gas. It got so bad that truck drivers were afraid to transport food because they might not have enough gas for the return trip.

The price controls also discouraged suppliers from bringing in more fuel. After all, why bother if they can’t generate a profit from it? Thus price controls artificially elevated demand while discouraging additional supplies. Needless to say, this was a recipe for disaster. To make matters even worse, the prolonged shortage made it hard for oil rigs in the U.S. to get the supplies they needed to operate. In short, the price gouging laws interfered with the production of the good whose scarcity “justified” the laws in the first place.

These disadvantages are not necessarily seen at first. But once they are examined, it is clear that price gouging laws do far more harm than good. Price controls hurt entrepreneurs and businesses, who lose a good opportunity to make a profit. This harms consumers, who now have less supply and, therefore, higher prices.

The only ones who gain are the lawmakers. An article from Forbes hits the nail on the head: “Politicians like anti-price gouging laws because consumers vote and businesses don’t. Being seen stepping into the breach, defending people suffering from some setback (storm damage, broken pipeline, etc.), is a great visual for a politician.”(Forbes)

Moreover, the same politicians who demonize entrepreneurs for wanting to make money often have cushy salaries and pensions themselves.

While enacting price controls is great politics, the economics speaks for itself. Bureaucrats can push laws, activate hotlines, and impose fines, but it’s the so-called price gougers who will be there bringing in critical supplies when disasters strike. Floridians can call 1-866-9NO-SCAM all they want, but they’re only harming themselves and their neighbors. That hotline was established by the same lawmakers and regulators who hurt their citizens at their most vulnerable for political points. Perhaps they are the true scammers.  

Works Cited 

​​Dorfman, Jeffrey. “Price Gouging Laws Are Good Politics But Bad Economics.” Forbes, Forbes Magazine, 23 Sept. 2016, www.forbes.com/sites/jeffreydorfman/2016/09/23/price-gouging-laws-are-good-politics-but-bad-economics/#371c86c464d3.