Price gouging - Revision history

Vipul: /* More explicit rationale */

2011-12-15T05:23:56Z

More explicit rationale

← Older revision		Revision as of 05:23, 15 December 2011
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	* They're able to induce buyers to cut back on their quantity demanded for the good. Those buyers who are less desperate for the good may thus choose not to buy the good.		* They're able to induce buyers to cut back on their quantity demanded for the good. Those buyers who are less desperate for the good may thus choose not to buy the good.

	{{quotation\|'''A POWER BLACKOUT EXAMPLE''': <toggledisplay>Suppose a natural disaster strikes, causing a mass electricity blackout. Some people already own flashlights and candles but are thinking of getting some extra ones just in case the blackout lasts longer than anticipated. Some people don't own them but don't have any urgent work to do and are willing to sleep through the power blackout. Some people have urgent work to do and are desperate for some form of illumination. A seller who has a limited stock of flashlights and candles induces each buyer to think twice before buying. As a result, those who already own flashlights and candles, or those who don't have urgent work, may choose to wait. Those who need them urgently may also choose to buy less than they otherwise would, making sure that everybody gets a few.</toggledisplay>}}		{{quotation\|'''A POWER BLACKOUT EXAMPLE''': <toggledisplay>Suppose a natural disaster strikes, causing a mass electricity blackout. Some people already own flashlights and candles but are thinking of getting some extra ones just in case the blackout lasts longer than anticipated. Some people don't own them but don't have any urgent work to do and are willing to sleep through the power blackout. Some people have urgent work to do and are desperate for some form of illumination. A seller who has a limited stock of flashlights and candles raises the price and hence induces each buyer to think twice before buying. As a result, those who already own flashlights and candles, or those who don't have urgent work, may choose to wait. Those who need them urgently may also choose to buy less than they otherwise would, making sure that everybody gets a few.</toggledisplay>}}

	===The main flip side===		===The main flip side===

Vipul: /* Shift in market-clearing price */

2011-12-15T05:20:45Z

Shift in market-clearing price

← Older revision		Revision as of 05:20, 15 December 2011
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	[[File:Demandexpansionandmarketprice.png\|500px]]		[[File:Demandexpansionandmarketprice.png\|500px]]

	In the short run, a dramatic outward shift of the demand curve can lead to a significant increase in the market price, because the [[short-run supply curve]] is highly price-inelastic. Over the longer run, the same expansion of demand may lead to a much smaller price increase, because the [[long-run supply curve]] is ~~steeper~~ (more price-elastic) because fixed costs can be reconfigured in the longer run leading to more flexibility.		In the short run, a dramatic outward shift of the demand curve can lead to a significant increase in the market price, because the [[short-run supply curve]] is highly price-inelastic. Over the longer run, the same expansion of demand may lead to a much smaller price increase, because the [[long-run supply curve]] is less steep (more price-elastic) because fixed costs can be reconfigured in the longer run leading to more flexibility.

	===More explicit rationale===		===More explicit rationale===

Vipul at 18:59, 25 July 2011

2011-07-25T18:59:06Z

← Older revision		Revision as of 18:59, 25 July 2011
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	It is, however, perhaps even more likely that in the absence of sellers increasing their prices, these poor or cash-strapped people would be unable to purchase the good, given that a general scarcity is more likely.		It is, however, perhaps even more likely that in the absence of sellers increasing their prices, these poor or cash-strapped people would be unable to purchase the good, given that a general scarcity is more likely.

			==References==

			===Weblog entries/articles===

			* [http://www.econlib.org/library/Columns/y2007/Mungergouging.html Michael Munger on price gouging, in the context of Hurricane Frain in North Carolina (a US state) in 1996] (also related: [http://www.econtalk.org/archives/2009/10/munger_on_short.html a podcast interviewing the author of this article])
			* [http://econlog.econlib.org/archives/2003/09/the_case_for_pr.html The case for price gouging, Arnold Kling, September 2003, EconLog]
			* {{econlibsearch\|"price+gouging"}}
			* {{marginalrevolutionsearch\|"price+gouging"}}

Vipul: Created page with "==Definition== The term ''price gouging'' is a morally loaded term without a precise meaning, but it typically refers to a seller sharply and significantly increasing prices for..."

2011-07-25T18:24:55Z

Created page with "==Definition== The term ''price gouging'' is a morally loaded term without a precise meaning, but it typically refers to a seller sharply and significantly increasing prices for..."

New page

==Definition==

The term ''price gouging'' is a morally loaded term without a precise meaning, but it typically refers to a seller sharply and significantly increasing prices for a good in the short term in anticipation of, or in response to, a substantial short-run increase in demand (i.e., an outward shift of the demand curve), typically due to an emergency, ''without'' (or disproportionate to) an increase in the cost of production.

==Rationale for price gouging==

===Shift in market-clearing price===

The simplest rationale for price gouging, and explanation for why, ''prime facie'', it need not be inefficient, is in terms of the theory of the [[market-clearing price]]. When there is a outward shift (expansion) of the demand curve, the market-clearing price increases:

[[File:Demandexpansionandmarketprice.png|500px]]

In the short run, a dramatic outward shift of the demand curve can lead to a significant increase in the market price, because the [[short-run supply curve]] is highly price-inelastic. Over the longer run, the same expansion of demand may lead to a much smaller price increase, because the [[long-run supply curve]] is steeper (more price-elastic) because fixed costs can be reconfigured in the longer run leading to more flexibility.

===More explicit rationale===

As the expansion of demand curve picture makes clear, an expansion of the demand curve leads to a shortfall, where the quantity demanded exceeds the quantity supplied. This shortfall typically leads to some form of [[non-price competition]] (such as [[queueing]]) where buyers compete with each other to acquire the good, expending valuable resources that are not captured as gains by anybody, and where the good may not ultimately be acquired by the buyer who values it most. By raising the price, sellers avert shortfall in two ways:

* They're able to induce themselves (or their factors of production) to produce more of the good, induced by the higher prices. In particular, even if there is a ''local'' shortage due to an emergency, a sufficiently high price can encourage sellers from nearby places to ship the commodity to the area.
* They're able to induce buyers to cut back on their quantity demanded for the good. Those buyers who are less desperate for the good may thus choose not to buy the good.

{{quotation|'''A POWER BLACKOUT EXAMPLE''': <toggledisplay>Suppose a natural disaster strikes, causing a mass electricity blackout. Some people already own flashlights and candles but are thinking of getting some extra ones just in case the blackout lasts longer than anticipated. Some people don't own them but don't have any urgent work to do and are willing to sleep through the power blackout. Some people have urgent work to do and are desperate for some form of illumination. A seller who has a limited stock of flashlights and candles induces each buyer to think twice before buying. As a result, those who already own flashlights and candles, or those who don't have urgent work, may choose to wait. Those who need them urgently may also choose to buy less than they otherwise would, making sure that everybody gets a few.</toggledisplay>}}

===The main flip side===

The flip side, or ignored aspect, of this rationale, lies with the [[wealth effect]] -- some people may be truly desperate for the good, but may be too poor or may lack the immediate cash to purchase it. Although wealth effects are operational in a number of situation, unanticipated emergencies are a particularly strong case.

It is, however, perhaps even more likely that in the absence of sellers increasing their prices, these poor or cash-strapped people would be unable to purchase the good, given that a general scarcity is more likely.