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The Great Toilet Paper Shortage of 2020: A Retrospective
A defense of price gouging
Shopping carts filled with toilet paper. Empty shelves. Shaming on social media. The Coronavirus upended daily life and prompted a debate about the importance of individual and economic health. Yet one topic had near-universal agreement: price gouging is bad. Yes, the shelves were out of toilet paper, but the thinking was businesses should not be allowed to drastically increase their prices to meet demand. At first glance, this makes sense. Price gouging seems like the embodiment of corporate greed; raise prices during an emergency and make lots of money. Take a closer look, however, and it becomes clear the effects of price gouging are nuanced. In certain circumstances, it is not reprehensible, but in fact, necessary.
It is important to remember that prices are not set at random, nor are they the result of the secret deliberations of a shadowy cabal. There is not a group of men in a smoke-filled room throwing dice to see what the price of avocados will be this week. Instead, prices are generally set by the free market. Thousands of sellers and millions of consumers interact with each other, with sellers trying to maximize profits and consumers trying to maximize welfare. If consumers decide they want to buy quinoa, then prices go up. If good weather leads to a glut of frozen concentrated orange juice, then prices go down. The famed invisible hand of Adam Smith acts as if a benevolent social planner was maximizing the benefit of society, at least in theory. The result is an efficient way to allocate a scarce resource to those that have the highest value.
In spring and summer 2020 the news was filled with images and stories of a nationwide toilet paper shortage. Usually, shortages occur because of a breakdown in the supply chain or a sudden increase in usage. Instead, the Great Toilet Paper Shortage of 2020 occurred because a few consumers thought they should stock up. Some schmuck went to Costco and thought to themselves, “I don’t think there’s going to be a toilet paper shortage, but there could be, so I should stock up just in case.” Then a second schmuck saw the first schmuck and thought, “That person is stocking up on toilet paper. They must think there’s going to be a shortage. They are probably wrong, but I should buy a bunch of toilet paper just in case.” A third schmuck saw the first two, and things snowballed from there.
It became a self-fulfilling prophecy. Toilet paper is not made in China and shipped to the United States. Covid didn’t force toilet paper factories to shut down. People weren’t actually using any more toilet paper than they were in the Spring of 2019. It was pure panic buying. At one point in May 2020 my roommate and I were down to our last roll of toilet paper. I had to drive around to stores trying to find some. Eventually, I found a CVS two towns over that had just gotten a delivery. Limit one 12-pack per customer. They had all their inventory kept behind the front desk like top-shelf booze in a liquor store. This was madness.
The worst part is that there is an easy fix. The Great Toilet Paper Shortage of 2020 could have been prevented if stores were allowed to do what they usually do when the demand for a good increases - raise prices. Then, only those who actually needed toilet paper would buy their normal amount. Those who otherwise were buying entire pallets to store in their basement, or resell themselves, would not bother. However, the state of Connecticut, like most states, has anti-price gouging laws in effect. You can’t increase the price of toilet paper by 50%, let alone 500%, to decrease demand. The result is people stock up, resulting in the lucky few having toilet paper sheds in their backyards while other people have to drive around searching for just a few rolls.
With everyday items, price gouging during a crisis, far from being malicious, helps ensure that those who most need a good are the ones who get it. Again, this is the entire point of prices in the first place. No one would advocate for a government order that all supermarket items must be sold at a 90 percent discount after a hurricane, and with good reason. The result would be hoarding on an unprecedented scale and empty shelves for weeks. Yet this is exactly what the government does when it prevents price gouging. It forces stores to sell goods at a steep discount, well below the free market price. The price of toilet paper should have been allowed to double, quadruple, or increase to any factor of magnitude the market sees fit.
Some will quickly point out that it allows businesses to profit from the misery of others. This is true to some extent. Somewhere along the supply chain, someone would be raking in the dough. On the other hand, these profits would again serve a purpose, the allocation of a scarce resource. Furthermore, if any business sets the price too high, making profits well above any other firm, then consumers would shop elsewhere. This is what allows gasoline prices to fluctuate widely through time but hardly at all in a localized area. If one gas station charged notably more than another down the street, then the market will respond. Most importantly, those high profits allow firms to reinvest some of their earnings to increase production, which will then help lower prices in the long run.
The second criticism is that certain goods, such as those relating to health care, do not exist in a free market. The invisible hand ceases to work in non-competitive industries and thus prices must be regulated. This is a much stronger argument. Price gouging should only be allowed in markets that are relatively open and unregulated. Toilet paper, not doctor’s appointments.
A third concern is that price gouging would result in a somewhat efficient allocation among those with disposable income, but low-income citizens would be forced out of the market. This is a valid criticism and needs to be taken seriously. If some cannot afford a good, then prices no longer allocate resources solely based on need. That said, the US government already has welfare programs in place to help address this issue. EBT and other social safety nets help avoid undue hardship for low-income individuals.
Having a system where poor people can’t buy a good sounds bad. However, that ignores the fact that by banning price gouging, both low-income individuals AND high-income individuals can’t buy the good because nothing is available to buy. Keeping prices low to allow everyone to buy a good only works if there are goods to buy! Additionally, if prices were allowed to rise consumers would not hoard nearly as much, causing shelves to stay stocked and prices to drop in short order.
Compared to the rows of empty shelves, a world with price gouging is the preferable option. When prices are not allowed to increase, the allocation of goods is random. Consumers who happen to be in the right place at the right time are those who obtain that scarce resource. Only by allowing prices to function as an allocation mechanism can we ensure the best outcome for society.
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