Why Price Gouging Doesn't Exist

Why Price Gouging Doesn't Exist

June 11, 2007

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One Sunday in 2005, soon after the double whammy of hurricanes Katrina and Rita, I took several trips to my local hardware store. En route, I noticed two gas stations gazing at each other across the road. On my first trip, one was charging $3.41 a gallon for regular, while the other was charging $3.29. There, in a nutshell, is proof that gas price “gouging” does not exist.

Price gouging is generally defined as a vendor using unusual market conditions to exploit demand and extort unreasonably higher payments from his customers. Yet, outside the black market, price gouging is unlikely to exist in practice.

My encounter with the gas stations illustrates a basic economic lesson on supply and demand in situations of scarcity. Price is not an arbitrary figure. It contains a vast amount of information from the viewpoints of both supplier and the customer. In normal circumstances, it represents a balance between the effort and risk undertaken by the supplier to provide the product and the preferences and needs of the potential consumer taken in aggregate. Each individual consumer will have different preferences and needs—one may balk at a price that another finds perfectly reasonable that yet another considers a bargain—but as a whole the price represents a signal about the balance of considerations among consumers in the market for the product.

When the product becomes scarce, however, the producer notifies the consumer through higher prices that he may not be able to supply as much of the product as his customers want. Customers can then respond to this new reality and, again taken in aggregate, the market will respond to the scarcity by reducing its demand to meet the expected supply.