What is “price gouging”?
When demand for a good or service is especially high, sellers of those goods or services will often significantly increase the price to reflect the demand. This is typically referred to as “price gouging” when it occurs during emergencies such as hurricanes or pandemics. Price gouging is not the same as merely increased prices. In order to be considered price gouging, the demand must be extraordinarily high.
Classic examples of price gouging are stores selling umbrellas in unexpected rainstorms or snow shovels during a blizzard at inflated prices. Many believe that price gouging is unreasonable or unfair. However, if prices for high-demand goods and services are not allowed to increase, shortages ensue.
Why don’t price controls work?
Price controls (or price ceilings) restrict sellers, forcing them to keep prices low for high-demand products and services. When prices are not allowed to rise, the excess demand for the good or service leads to a shortage of supply.
There are plenty of examples of price controls leading to negative outcomes in a variety of markets. One common example is that of rent control. Rent control is a government-mandated control on rent prices within a specific jurisdiction. Rent control typically doesn’t reduce rents but rather controls their rise. Rent control increases demand for rent-controlled units but discourages landlords from entering or expanding the rental market, which decreases the supply of rental housing.
To learn more about this common example of price controls, watch our video on the consequences of rent control.