What is Price Gouging and Why is it Wrong?

Price gouging is the act of choosing to profit off someone else’s life-and-death desperation rather than to show generosity.

Floodwaters inundate Port Arthur, Texas, on Aug. 31, 2017
Floodwaters inundate Port Arthur, Texas, on Aug. 31, 2017 (photo: U.S. Air National Guard photo by Staff Sgt. Daniel J. Martinez)

Flowing in the commentary on the catastrophic floods in Texas, a meme is making the rounds. It shows bottled water, the single-serving type you might buy at a convenience store or from a vending machine. “Disneyland charges $3 a bottle and no one bats an eye. A store charges $1.78 during a storm and everyone loses their minds.”

The implied message is that if unusually high prices are acceptable in some situations, they are acceptable in all. Go a level deeper for the fundamental premise: Price rationing is the function of the free market, and it is best to let that market do its work.

Catholics don’t reject free market economic principles out of hand, and yet most of us instinctively understand that price gouging in a crisis is morally wrong.

There are two reasons for this, and both of them are related to a fundamental respect for free markets. The first is that the economic power of capitalism is intended to serve the needs of men, not the reverse; the second is that the situations where price gouging occurs are nearly always situations where markets are not truly free.


First Things First

Economics is the study of how to use scarce resources to meet unlimited human needs. Economists and other observers of human behavior have made some astute observations over the centuries on what seems to work and what doesn’t. Command economies, for example, tend to fail spectacularly.

One of the reasons that capitalism works pretty well is that it rests on the principle of human freedom. Catholicism is fundamentally about human freedom: We were created by God to freely choose to manage the earth and its resources in a way that brings forth the flourishing of mankind and of all that we survey.

In an unfallen world, the pursuit of “self interest” as defined by economists in market theory would be identical to the pursuit of the true good. But this world is fallen. We all know that even when we are fully informed about what is in our best interest, we humans don’t always act for our own good. It is bad for ourselves, and for others, to trust our own ideas of “self interest” unchecked. Thus as rational beings fighting against concupiscence, we must make ourselves master of free market economic principles, rather than letting the pursuit of profit master us.


Are Crisis Markets Really Free?

Let’s analyze the act of “price gouging.” In an emergency situation, the supply of urgently-needed goods is sharply restricted.  Emergencies also change the demand curve for goods and services. Demand for non-essential items decreases — no one has time to worry about haircuts or jewelry when they are fighting just to survive the next several hours. Demand for essential-to-survival items remains as strong as ever, though.

Though the demand curve for life essentials is not a perfect vertical line (“perfectly inelastic”) — people will purchase more than they need when prices are very low, and will purchase less than they otherwise would when prices are exceptionally high — for the purposes of economic analysis we could say that demand for essential goods and services is constant across price points.  In the face of restricted supply, the intersection of supply and demand therefore moves to a significantly higher price point. Libertarians would argue that this shift in prices is the natural functioning of the market to ration goods via pricing.

What is missing from this argument, though, is that in the face of disastrously limited supply, competitive markets cease to exist.  The price-gouger is a monopolist. The market lacks the characteristics necessary to approach “perfect competition” such as a large number of buyers and sellers, lack barriers to entry and exit, price taking, and factor mobility. Any standard economic analysis would verify that the conditions for efficient markets are lacking.

You can’t say you are seeing competitive market principles in action when in fact there is not a competitive market.


Freedom is Something More Than Markets

What happens when suppliers pursue financial profit as their sole good in a crisis situation? They experience the deleterious effects of making the pursuit of money their god — only magnified.

It is always bad for the human soul to place monetary gain as the highest good. Capitalism works inasmuch as the “self interest” we pursue is not just financial wealth but our true good for the whole person.

Thus economic analysis recognizes, for example, that a mother who is free to do so might stay home to rear her children, forgoing a paycheck and career, even though financially it puts her at a significant disadvantage. Her “self-interest” is not, when it comes to family life, solely a question of income.

Economics does not assume that money is our god.

In a crisis situation, it is possible for monopoly suppliers to charge prices for goods that buyers cannot afford — thus becoming not ordinary monopolists but price-gougers. Note well: This doesn’t mean buyers don’t recognize the value of the supplier’s work and risk. Rather, the problem is that the reason it is possible to charge exorbitant prices is because the goods and services in question are necessary for survival. People will literally die if they don’t have clean water.

Contrast this to the Disneyland scenario: People will not literally die — nor even figuratively do so, we hope — if they don’t have a Disney vacation.

Price gouging is the act of choosing to profit off someone else’s life-and-death desperation rather than to show generosity.

It is bad for you to do this to yourself.

Your soul is harmed when you profiteer off other people’s vulnerability.

As far as governments are concerned, price gouging needs to be curbed in order to prevent civil unrest and to assure the survival of citizens.

But as far as you are concerned? Price gouging needs to be curbed because your eternal life is at stake.


Jennifer Fitz studied international politics and economics at the Institut d’Etudes Politques in Paris, France and at the University of South Carolina before completing her masters degree in business administration.