Regulation or Free Market: Finding the Right Policy to Deal With Price-Gouging

Price controls may alleviate an immediate problem but experts warn they can create longer-term challenges
April 7, 2020 Updated: April 8, 2020

With the ongoing crisis due to the COVID-19 pandemic causing a scarcity of some items, price-gouging has become an issue, prompting Ontario Premier Doug Ford to enact new legislation, particularly to protect essential goods like face masks, hand sanitizer, and disinfectant wipes.

In reaction to a Toronto store charging $29.99 for Lysol wipes, Ford “declared war” on price-gougers by enacting an emergency order that would impose such penalties as a $100,000 fine and a year in jail, while corporations convicted for price gouging could be fined up to $10 million.

Many agree that such measures are necessary to deter those who would exploit others for personal gain in a time of crisis. But there are also those who say in the long run, it’s better to simply let the market adapt to the circumstances.

Vincent Geloso, a professor of economics at King’s University College, argues that allowing the price mechanisms to work in order to signal demand and increase the supply is a better approach.

“It’s not just a matter of being pro free-market here, it’s just a basic economics argument,” Geloso said in an interview.

“It sucks, obviously, as something that was once abundant is not at the moment, but the reality is any forced solution is not going to work. If anything, it’s better to remove any sort of barriers preventing the reallocation of resources.”

And in a crisis, he says, governments and societies have to be prudent in how they endeavour to produce and distribute the resources effectively.

“For instance, when it comes to face masks, who do you think needs them most: the hospitals or the average person? I’d say the hospitals who are more likely to want to buy more of them. The increased scarcity obviously has a huge bearing on how we approach this and determine this.”

Geloso cites the example of some people in Texas who, during Hurricane Harvey, bought large amounts of bottled water and took them in U-Haul trucks to Houston to sell. He says this shows that the price mechanism can work by “incentivizing an increase in supply and a reallocation of resources to where they are needed.”

Rod Dreher, an editor for the American Conservative, takes a different view.

In a recent article, Dreher cites the case of brothers Matt and Noah Colvin, who drove an SUV to stores in Tennessee and Kentucky and bought up all the bottles of hand sanitizer and packs of antibacterial wipes they could find, cleaning out store shelves everywhere they went.

Matt Colvin, an Amazon merchant, then began selling the items on Amazon at prices far higher than he had paid. He told The New York Times that his price included his labour, Amazon’s fees, and transportation costs.

But before long, Amazon pulled Colvin’s items and suspended other sellers for greatly increasing prices on similar items, leaving Colvin stuck with over 17,000 bottles of hand sanitizer and other items with no way to sell them. Meanwhile, there’s a shortage of such items in the United States as people seek to protect themselves from COVID-19.

Colvin eventually decided to donate his hoarded supplies. But before his act of charity, Dreher argued that price-gougers like Colvin should have their supplies confiscated by the government so that they can be distributed to those who need them.

“And when this is over, if there are legal charges to pursue against people like him, I hope the state will do so,” he wrote. “Matt Colvin, and people like him—the Times says there are ‘thousands’ across the country—are profiting off the suffering of others.”

Richard Owens, a lawyer and Munk Senior Fellow at the MacDonald-Laurier Institute, says there are trade-offs when it comes to economic, moral, and political questions during an extraordinary situation like the one we’re in.

In a time of uncertainty, Owens says, politicians have no choice but to do something to address immediate concerns and maintain public confidence in the government.

“Price-gouging restrictions can be political theatre to demonstrate equal treatment and encourage solidarity and civil order,” he says. “They are also meant to undo hardship for less-advantaged buyers who have the same basic needs as more advantaged ones.”

Though this approach may result in a decrease in economic efficiency, it “purchases morale,” Owens says.

“Generally,” he adds, “price-gouging penalties should be applied sparingly and judiciously in egregious cases. After all, high prices will encourage much faster re-supply and bring prices back down sooner, which is in everyone’s interest.”

Geloso points out that enacting legislation to prevent price-gouging “will just make the supply more inelastic as it hinders the ability people have to produce.”

“The higher demand obviously behooves people to try and increase the supply,” he says.

Instead of regulating, he suggests governments do what they “can be good at,” which is redistribution.

“I don’t want a poor family paying $100 for a box of diapers, but regulating heavily is going to make it worse in the long-term for them.”