Anti price gouging laws were enacted across this nation with the best intentions however they very often produce shortages of essential goods. This is exactly what happened at the beginning of the Coronavirus crisis. In a purely free market economy the shortage of toilet paper would have been mush less severe. We probably would not have witnessed near riots and even fist fights over a shortage of this so necessary product.
When the mass buying toilet paper began and store inventories began to run low the store keepers should have automatically raised prices. A drastic run on toilet paper should have led to a drastic rise in the price. This would have discouraged the mass buying and hording when inventories in the stores began to run low.
Because of the increased sale of toilet paper the store owners would have ordered more toilet paper from their suppliers who would then charge the store owners more if their supplies began to run low. Quickly, because of free market forces the increased price and demand of toilet paper would have reached the manufacturers who would produce more and ship it faster down the supply chain to the stores.
Here is how the Foundation for Economic Education explained the factors behind the toilet paper shortage:
From an economic perspective, the value of toilet paper is much higher now than it was pre-pandemic. But with the price of toilet paper the same as it always was and not reflecting its increased value, there is nothing to prevent individuals from buying as much of it as possible. Indeed, that’s the rational consumer response. But if shopkeepers increased the price of toilet paper to reflect its new value, suddenly we would think twice about hoarding it and only take as much as we need. These rising prices would also signal supply chains of the increased value of toilet paper, prompting toilet paper manufacturers to boost production.
In natural disasters, like a hurricane or an earthquake or a pandemic, we often hear people decry “price gouging” and blame “greedy shopkeepers” for trying to profit off of misery. Yet, price gouging is an unfair term. If the shopkeeper raises the price of toilet paper (or hand sanitizer or bleach or eggs or any of the other items that are currently in high demand), then it incentivizes the consumer not to hoard and to buy only as much of an item as is truly needed. It’s not greedy, it’s responsive.
If the store charges too much customers will not buy the product or they will buy very little then the store will need to lower the price. When more product becomes available the store will need to lower the price if it does not sell. The store will eventually need to order less causing the price up the supply chain to fall signaling the producers to produce less.
Because of the price controls restricting the price the store can charge they are not able to pay their suppliers more. The suppliers are not able to pay the manufacturers more. There is no incentive for the producers to rapidly produce more and no incentive for the suppliers to rush the product down the supply chain resulting in delays in restocking shelves.
Government interference in the free market always produces far more negative results than positive no matter how well intentioned they are. Unfortunately most colleges do not teach free market economics and politicians who do not support anti price gouging laws are decried as monsters.
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