do price gouging laws make sense from an economic perspective?

Question

do price gouging laws make sense from an economic perspective?

Answer 1

That is a tough question. When you start talking about Normative economics (what should be done) there are always several ways of looking at a problem.

Price gouging is setting a price above the market when no alternative source is available. In other words, when local supply tightens, I jack my prices way up.

In the long run, (ceteris paribus) there is no need for laws to stop it, because the market will correct the problem: Other people will go into the business and the local supply will normalize.

However, as Keynes was found of saying, "by then we'll all be dead!" So using government power (through laws) to prevent price gouging does prevent people from being hurt by the abnormally high prices.

Because all things are not always equal, sometimes the market is unable to correct. There might be local corruption, human intervention to limit the supply artificially, geographical reasons, etc. that prevent the market from correcting. In those cases it is crucial to have laws to prevent the abuse.

To take the other side though...

Notice that in our first example, the end result is increased competition (new competitors enter the market). With government controls preventing the first company from gouging, there is never a compelling reason for the second company to start. Thus, in a perverse way, price gouging laws can be anti-competitive because they distort the market.
(OK, it is a weak argument, but it had to be made.)

Answer 2

Basically speaking, any laws related to price do not make sense from a economic perspective.

For example, if a company charges $100 for a toothbrush, more companies will be interested in getting into the toothbrush business and the prices for toothbrushes will drop.

If the government steps in and put a ceiling on the price of a toothbrush, the economy will not equalize and the same old company will continue to charge exactly what the government asks and no other companies will compete.