By Byron Pelton
During times of global uncertainty, it’s not uncommon to find that certain prices become more volatile–especially for commodities that involve inputs from overseas. However, it’s possible that the extent to which some prices rise is due to exploitation, rather than an honest attempt to cover costs. Especially during a crisis, sellers can raise the prices of essential goods “Unconscionably” high, knowing that people will still buy them. It’s supposed that governments have an obligation to step in and save consumers from this form of exploitation, known as “Price gouging.”
The argument for this intervention generally rests on two premises: The first premise is the idea that people in government can observe all of the relevant costs sellers face, and use it to calculate a “conscionable” price. The second is that buyers are better off when sellers are bound to a “conscionable” price. Though they may seem like common sense, neither premise holds up under scrutiny.
When President Biden called for gas prices to “reflect the price you’re paying for the product,” he was alluding to the way that people in government try to add up the costs sellers face (e.g. raw inputs, labor, rents) in order to determine a fair price. While these are valid examples of explicit costs, they’re not the only ones worth considering: there are other costs which are impossibly difficult to measure because they’re implicit in people’s actions.
One type of implicit cost is known as an opportunity cost. When sellers forego the potential benefits of doing business where conditions are more favorable, they incur opportunity costs. During Hurricane Katrina, for example, sellers who remained in the aftermath faced new problems associated with having customers, workers, and parts/ingredients being more difficult to reach. But, what they forwent by choosing not to escape to higher ground won’t show up on any receipts.
Risk imposes another type of cost which is difficult to measure. During or after a crisis, many types of risks may pervade the landscape–whether natural, such as aftershocks, or human ones, like a breakdown in civil order. All might represent a threat to a prospective seller. The decision as to what level of risk someone should accept is necessarily subjective, and like that of opportunity cost, won’t show up as an expense on paper. And yet, it’s a fair and weighty consideration.
For these reasons, it is impossible for people in government to fairly distinguish between honest sellers and malicious ones, based solely on the fact that they raised prices during a crisis. This poses an insurmountable problem for officials who try to determine what decisions are truly “Unconscionable,” rendering the first premise underlying the argument for price gouging laws untenable.
The second premise also falls short, because consumers are made worse off, not better when sellers are bound to an artificially low price. This is because prices affect people’s desire to participate in a market; when prices aren’t allowed to rise, some prospective sellers will simply refuse to participate. Basic intuition tells us that when someone is willing to part with some amount of money for something, they value what they received more than the money they spent. Hence, they’re necessarily made better off by being able to spend their money voluntarily, even if the price they pay is higher than normal. In other words, it’s better to be given the option to buy something essential, even at a “gouged” price, than to be given no option at all.
Instead, consider that it’s only possible to gouge the price of a good as long as it’s kept essential. Keeping the price of gasoline artificially low does exactly that. Further, the fact that so much of our infrastructure is designed around driving ensures that people will remain beholden to fossil fuels. Strict zoning regulations have stretched society thin and lead to greater sprawl, which is not only bad for the environment but also locks consumers into a more expensive, car-based lifestyle.
A repeal of rigid, single-family zoning laws that artificially restrict the supply of housing from catching up to the number of workers in a city would allow for a more sustainable, walkable, and survivable community. A cap and trade policy would allow the true costs of carbon emissions to be reflected in the price of those goods and services which imbibe them, while allowing those who are most prepared to absorb these costs to do so. At the same time, pursuing any energy source, no matter how harmful, simply because it’s “Made in America,” drives us away from an economy that can be sustained, not closer. Aiding and retraining workers who are caught in the momentum shift of an economy that’s no longer artificially tailored to fossil fuels would help build support, both politically and economically, for climate-friendly energy solutions.
Also consider: A rise in oil prices was a leading contributor to inflation in the United States as of late. Reducing our reliance on fossil fuels would help insulate us from these types of shocks. Indeed, energy is such a volatile category, it’s left out of core inflation measures! The distress that Americans feel is not just a far-flung future that might occur with some unplanned transition into alternative fuels, but is a current, painful reality that comes from ancient ones which are doomed to fail.
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