In Praise of Price Gouging

Laws limiting price gouging also reduce supply. If gas goes to $10 per gallon, there is a huge incentive for anyone who has a gas truck to fire it up, buy some gas out in the sticks, bring it in, and sell it to local gas stations. If you can’t sell it for a good price because the gas stations can’t recoup that price, it doesn’t happen.

Supplies interact. A truck bringing in food really should get some of the available gas. But if a limit on price gouging means that the truck can’t fuel up, it can’t bring in food. If gas prices are free to rise, but there is a gouging limit on food prices, the truck can’t afford the gas.

Inventory is a great source of supply. If you run a Home Depot in Florida, how many sheets of plywood do you keep around? Well, if you’re allowed to sell them for $100 each when the next hurricane is coming, a lot. If you must charge only the regular price until the shelves empty out, then not so much. Inventory is expensive.

“Windfall” profits belong in the pantheon of economic deities along with price gouging. In competitive industries, they’re what encourage people to enter and offer new supply. If windfall profits are taxed away, sellers are just as discouraged to maintain inventory, stay open, procure scarce supply, or all the other heroic efforts they make in difficult times.

Price gouging directs scarce resources to the people who really need them. It encourages bringing new supply in, holding stockpiles for a rainy day, efficiently using the stockpiles we have sitting around, and substituting for less-scarce goods when we can.

Anti–price gouging efforts also target resellers. Suppose you have 20 plywood sheets in your basement, waiting for that big remodel. The day before the hurricane, put them on Facebook Marketplace, or just out in front of the garage, for $100 each. That way someone else gets to save their house—unless the cops are going to come arrest you for it.

Fairness concerns

But what about people who can’t afford $10 gas and simply have to get, say, to work? Rule No. 1 of economics is: Don’t distort prices in order to transfer income. First, take a breath. In the big scheme of things, even a month of having to pay $10 a gallon for gas is not a huge change in the distribution of lifetime resources available to people. “Afford” is also a squishy concept. You might say you can’t afford $100 to fill your tank, but if I offer to sell you a Porsche for $100, you might suddenly be able to “afford” it.

More deeply, if distributional consequences of a shock are important, then hand out cash. Give people $100 to “pay for gas.” But let them keep the $100 or spend it on something else if they look at the $10 price of gas and decide it’s worth resorting to inconvenient substitutes such as carpooling, taking public transit, riding their bicycle, or not going. Many governments are tempted to subsidize demand for gas only. Subsidizing demand in the face of limited supply just drives the price up even more.

This is, mostly, what the US government did during the pandemic. There was a lot of noise about price gouging then, too, but by and large the government just handed out checks so everyone could pay higher prices (with the exception of rental housing). We got inflation, but we did not get the devastation that would have been caused by price controls and rationing.

Yes, rationing. Nobody likes price gouging, but choices are always between alternatives. How else but higher prices are we going to decide who gets the short supply? The alternative to rationing by price is rationing by queues, or by political preference, or by who you know.

Paying higher prices is a reduction in your real income, and nobody likes that. But with less to go around, our collective real income is lower, no matter what the government does about it. The government can only transfer resources, not create them. And all the fixes to price gouging make the shortage worse by discouraging people from cutting back on demand or bringing in new supplies.

Fighting cultural currents

Yet the cultural and moral disapproval of price gouging is strong. Going back thousands of years, people (including theologians) have felt that charging more than is deemed customary is immoral, especially if the merchant happened to have an inventory purchased in an earlier time. This “just price” moral feeling surely motivates a lot of the campaign against price gouging. Economics has only understood how virtuous price gouging is since the work of Adam Smith 250 years ago.

Indeed, companies are reluctant to price gouge. Costco let the shelves run out of toilet paper rather than raise prices. Other stores rationed: You can only have four rolls—no matter if you have a household of eight people with diarrhea or you’re simply stocking up your summer house just in case.

Their reluctance goes way beyond laws. To some extent, they are afraid of being smeared by politicians. Plus, price gouging is terrible public relations—probably, you could argue, for good reason: Stores want a reputation for buying cheaply and passing on the low cost to the customer.

As much as the United States is the land of free markets, it has a ways to go in its cultural acceptance of market behavior. Our freedom-loving ethos should be, “You’re free to charge what you want for your property, and I’m free to not buy.” It is not.

Uber’s surge pricing was an important lesson to me. I loved it. I could always get a car if I really needed one, and I could see how much extra I was paying and decide if I didn’t need it. I was grateful that Uber let me pay other people to postpone their trip for a while, and send a loud signal that more drivers were needed. But drivers reported that everyone else hated it and felt cheated. (Now Uber just folds surges into the quoted price. People seem not to get mad about that, but it’s less clear that you could go more cheaply if you waited.)

This cultural and moral disapproval came home to me strongly about 25 years ago. My wife and I were driving from Chicago to Boston in our minivan with four young children, a dog, and my mother. We got to upstate New York and needed to stop for the night. This was before cell phones and the internet, so the common thing to do was to pull off at a big freeway exit and see what was available. Nothing, in this case.

We tried hotel after hotel. We asked front desk staff to call around. Nothing. It turns out this was the weekend of Woodstock II. As the evening wore on, the children were turning into pumpkins. Finally, we found a seedy Super 8 motel that had two rooms left, for $400. This was back when Super 8 motel rooms were about $50 at most. I said immediately, “Thank you. We’ll take them!”

My mom was furious. “How dare he charge so much!”

I tried hard to explain. “If he charged $50, or $100, those rooms would have been gone long ago, and we’d be sleeping in the car tonight. Thank him and be grateful! He’s struggling to run a business. We don’t need presents from people who run Super 8s in upstate New York.”

But, though an amazing, smart, wise, and well-traveled woman, she wasn’t having it. Nothing I could do would persuade her that the motel owner wasn’t being terrible in “taking advantage of us.”

It is surely morally worthy to give what you have to your neighbors, especially the less fortunate, in a time of need. But we should not demand gifts. And appropriation of property by threat of force, turning off the best mechanism we know for alleviating scarcity, does not follow. Moral feeling is a terrible guide for lawmaking.

John H. Cochrane is a senior fellow of the Hoover Institution at Stanford University and was previously a professor of finance at Chicago Booth. This essay is adapted from a post on his blog, The Grumpy Economist.