DEFINING "PRICE GOUGING" BY EXAMINING THE (ONLY) SENSIBLE REASON TO PROHIBIT IT AND HOW THE PROHIBITION SHOULD WORK

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During times of disaster many use the term “price gouging” as an epithet to describe and condemn seemingly large price increases for basic necessities. Many states have latched on to this epithet and enacted laws prohibiting price gouging and effectively capping post-disaster prices at pre-disaster levels. And following disasters Congress often threatens similar legislation. Economists generally condemn these prohibitions on the grounds that free markets will produce socially and economically optimal results in post-disaster scenarios, or, at least better results than price caps. All this debate and legislative action has taken place while price gouging remains a largely indefinite concept and while economists and lawmakers ignore each other’s legitimate concerns.

This paper identifies the sole legitimate reason for lawmakers to prohibit price gouging and recommends ways that laws can be structured to further that legitimate objective while recognizing the importance of economists’ legitimate assertions that free markets will produce better results than markets limited by price caps. This paper concludes with a definition of price gouging derived from reconciling the legitimate concerns of economists and lawmakers.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Theodore Flo | Attorney Advertising

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