Simple Case Study of Price Gouging
Price gouging is generally defined
as charging a price that is higher than normal or fair, usually in times of
natural disaster or other crisis.
More specifically, price gouging can be thought of as increases
in price due to temporary increases in demand rather than
increases in suppliers' costs (i.e. supply).
The term is
not in widespread use in mainstream economic theory, but is
sometimes used to refer to practices of a coercive monopoly which raises
prices above the market rate that would otherwise prevail in a competitive
environment.
In case there is an
increase in demand, there isn't a way for everyone to get what they want at the
original market price.
Instead, if the price doesn't change, a shortage will
develop since the supplier won't have an incentive to make more of the product
available (it wouldn't be profitable to do so and the supplier can't be
expected to take a loss rather than raise prices).
When supply and demand for an item are in
balance, everyone who is willing and able to pay the market price can get as
much of the good as he or she wants (and there is none left over).
This balance
is economically efficient, since it means that companies are maximizing profit
and goods are going to all of the people who value the goods more than they
cost to produce (i.e. those who value the good most).
When a shortage develops,
in contrast, it's unclear how the supply of a good gets rationed- maybe it goes
to the people who showed up at the store first, maybe it goes to those who
bribe the store owner (thereby indirectly raising the effective price), etc.
The important thing to remember is that everyone getting as much as they want
at the original price is not an option, and higher prices would, in many cases,
increase the supply of needed goods and allocate them to people who value them
the most.
Price gouging is typically
thought of as immoral, and, as such, price gouging is explicitly illegal in
many jurisdictions. It's important to understand, however, that this concept of
price gouging results from what is generally considered to be an efficient
market outcome.
Price gouging might be problematic, nonetheless price that is
higher than normal or fair,
usually in times of natural disaster or other crisis.
Alternatively, it may refer to suppliers'
benefiting to excess from a short-term change in the demand curve.
When supply and demand for an item are in
balance, everyone who is willing and able to pay the market price can get as
much of the good as he or she wants (and there is none left over).
This balance
is economically efficient, since it means that companies are maximizing profit
and goods are going to all of the people who value the goods more than they
cost to produce (i.e. those who value the good most).
When a shortage develops,
in contrast, it's unclear how the supply of a good gets rationed- maybe it goes
to the people who showed up at the store first, maybe it goes to those who
bribe the store owner (thereby indirectly raising the effective price), etc.
The important thing to remember is that everyone getting as much as they want
at the original price is not an option, and higher prices would, in many cases,
increase the supply of needed goods and allocate them to people who value them
the most.
Price gouging is typically
thought of as immoral, and, as such, price gouging is explicitly illegal in
many jurisdictions. It's important to understand, however, that this concept of
price gouging results from what is generally considered to be an efficient
market outcome.
Price gouging might be problematic, nonetheless price that is
higher than normal or fair,
usually in times of natural disaster or other crisis.
Alternatively, it may refer to suppliers'
benefiting to excess from a short-term change in the demand curve.
A prevalent concern surrounding price gouging is that it exploits consumers. Supporters of anti price gouging laws argue that it is morally wrong for sellers to take advantage of buyer’s vulnerability and increased demand.
A prevalent concern surrounding price gouging is that it exploits consumers. Supporters of anti price gouging laws argue that it is morally wrong for sellers to take advantage of buyer’s vulnerability and increased demand.
Opponents argue that buyers are not coerced to take part in this exchange, and they voluntarily agree to pay the seller’s asking price.
Opponents argue that buyers are not coerced to take part in this exchange, and they voluntarily agree to pay the seller’s asking price.
The majority
of laws apply only to price shifts during a time of disaster.
Most laws
apply exclusively to items which are essential to survival.
Laws limit
the maximum price that can be charged for given goods.
Nonetheless, critics claim that laws against price-gouging could discourage businesses from proactively preparing for a disaster.
Many libertarian economists oppose price gouging legislation and argue that it prevents goods from going to individuals who value them the most and not just to those with the greatest wealth.
According to the theory of neoclassical economics, anti-price gouging laws prevent allocative efficiency.
Nonetheless, critics claim that laws against price-gouging could discourage businesses from proactively preparing for a disaster.
Many libertarian economists oppose price gouging legislation and argue that it prevents goods from going to individuals who value them the most and not just to those with the greatest wealth.
According to the theory of neoclassical economics, anti-price gouging laws prevent allocative efficiency.
Allocative efficiency refers to when prices function properly, markets tend to allocate resources to their most valued uses. In turn those who value the good the most (and not just the wealthiest) will be willing to pay a higher price than those who do not value the good as much.
According to Friedrich Hayek in The Use of Knowledge in Society, prices can act to coordinate the separate actions of different people as they seek to satisfy their desires.
Economists Thomas Sowell and Walter E. Williams, among others, argue against laws that interfere with large or exorbitant price changes.
According to this view, high prices can be viewed as information for use in determining the best allocation of scarce resources for which there are multiple uses.
According to Friedrich Hayek in The Use of Knowledge in Society, prices can act to coordinate the separate actions of different people as they seek to satisfy their desires.
Economists Thomas Sowell and Walter E. Williams, among others, argue against laws that interfere with large or exorbitant price changes.
According to this view, high prices can be viewed as information for use in determining the best allocation of scarce resources for which there are multiple uses.
Video Spoiler Tags Alert:
Scarcity,Supply and Demand
Price Gouging
Opportunity Cost
Consumer Behaviour
Producer Behaviour
Competition
References :
Prof. Matt Zwolinski (University of San Diego,USA)Scarcity,Supply and Demand
Price Gouging
Opportunity Cost
Consumer Behaviour
Producer Behaviour
Competition
www.learnliberty.org
http://economics.about.com/od/changes-in-equilibrium/ss/The-Economics-Of-Price-Gouging.htm
http://en.wikipedia.org/wiki/Price_gouging
accessed on 30th August 2014
Labels: 120720140009, M.Natsir Arif, Microeconomics, Microeconomics Assignment (Matriculation Class '14)
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