Sandra Klein – March 17, 2020
My family spent our spring break enjoying the coast of Mexico and returned home to a world we barely recognized. Many stores were closed early because their shelves were bare. Shoppers feared the effects of a pandemic and being stuck at home without necessities, so they rushed out and bought up every bit of toilet paper in the city, even the crummy single ply stuff. With this huge increase in demand for toilet paper, why are we not seeing increased prices to allocate the resource rationally?
In most states, once a state of emergency is declared, anti-price gouging laws go into effect and the prices of necessities are essentially frozen. The tenderhearted among us may cheer this action, rejoicing that the poor or those on fixed incomes are still able to get the things they need during the crisis. But with a closer examination we see that the exact opposite is true, because without a higher price there will be no toilet paper left at all! During a time of crisis, it’s only rising prices for necessities that keep them available for the masses.
Prices act as signals to both buyers and sellers. A good’s increased scarcity is reflected in a higher price, and its decreased scarcity or abundance is reflected in a lower price. Whether or not the seller has heard of COVID-19 and the rush on paper goods, a higher price instructs him to bring more toilet paper to the market as soon as possible. The higher price may even induce some people who regularly keep large stocks of it in their attics to sell some of their marginal rolls. Conversely for the buyer, the higher price instructs him to conserve toilet paper because it comes at a higher cost in terms of other goods and services he can enjoy. When prices rise to reflect increased scarcity, shortages are avoided. In fact, Murray Rothbard pointed out that in free, unfettered markets there is no such thing as a shortage or surplus because prices rise and fall so that markets clear.
Prices should be allowed to rise for another important reason: these buyers and sellers are entering into a voluntary exchange in which they both expect to benefit. Each party to the transaction is offering something they value less than the item they will receive in exchange. Even the buyer paying the higher price expects to benefit. Because there is no coercion, the buyer can refuse to buy if he does not expect to be better off at the higher price. With new demand conditions, if prices are frozen at the pre-COVID-19 levels, shoppers buy more toilet paper to meet less and less urgent needs, such as the peace of mind from knowing that they have a six-month supply at home. The buyer only expects to benefit from that added peace of mind when the price is frozen at the prepandemic level. Meanwhile, toilet paper is all gone and unavailable for people who have a most urgent need, such as being completely out of toilet paper at home. Those people would be happy to buy toilet paper at even five times the price!
Through the years we’ve all heard the warnings that the world is running out of a number of resources: coal in the late nineteenth century, copper in the 1980s, fresh water in 2001, and phosphorus last year. Today it’s toilet paper. Rather than worrying that we’ll run out of any particular resource, we should fear government not allowing markets to work, preventing prices from reflecting relative scarcities. That truly is the only obstacle to a rational allocation of resources. The “price gouger,” then, can be correctly understood as a hero, not a villain.
Originally published at Mises.org. Sandy Klein is an Adjunct Professor of Economics at Baylor University’s Hankamer School of Business and a Fellow of the Mises Institute. She holds a PhD in economics from Auburn University, where she was a Mises Institute Resarch Fellow, and has taught at Auburn, the University of Georgia, the University of Missouri, and the Copenhagen Business School. Her work has appeared in the Quarterly Journal of Austrian Economics, the Journal of Management Studies, Applied Economics Letters, and other outlets.
