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Price gouging is a term for a seller pricing much higher than is considered reasonable or fair. In precise, legal usage, it is the name of a felony that applies in some of the United States only during civil emergencies. In less precise usage, it can refer either to prices obtained by practices inconsistent with a competitive free market, or to windfall profits.

Economic theory suggests that, even in unusual circumstances, price ceilings prevent incentives for the supply of goods. For example, in a disaster situation, a very high price for equipment (e.g. tents) will prompt hugely increased supply of the relevant goods. Libertarians are among those who think firms should be allowed to charge what they want regardless of the circumstances.

As a criminal offense, Florida's law is reasonably typical. Price gouging may be charged when a supplier of essential goods or services sharply raises the prices asked in anticipation of or during a civil emergency, or when it cancels or dishonors contracts in order to take advantage of an increase in prices related to such an emergency. The model case is a retailer who increases the price of existing stocks of milk and bread when a hurricane is imminent. It is a defense to show that the price increase mostly reflects increased costs, such as running an emergency generator, or hazard pay for workers.

The term is similar to profiteering but can be distinguished by being short-term and localized, and by a restriction to essentials such as food, clothing, shelter, medicine and equipment needed to preserve life, limb and property. In jurisdictions where there is no such crime, the term may still be used to pressure firms to refrain from such behavior.

Some support the ability to raise prices under such circumstances, asserting that government prohibition of the practice is a violation of individual rights or that the ability to raise prices has beneficial effects or both. While some economists who defend the practice use the term "price gouging", others disparage it as merely pejorative.

The term is not in widespread use in economic theory but is sometimes used to refer to practices of a coercive monopoly which raises prices above the market rate that would otherwise prevail in a competitive environment. [1] Alternatively, it may refer to suppliers' benefiting to excess from a short-term change in the demand curve.

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Criticism

In the United States, laws against price gouging have been held constitutional as a valid exercise of the police power to preserve order during an emergency, and may be combined with anti-hoarding measures. Exceptions are prescribed for price increases that can be justified in terms of increased cost of supply, transportation or storage. Statutes generally give wide discretion not to prosecute: in 2004, Florida determined that one-third of complaints were unfounded, and a large fraction of the remainder were handled by consent decrees, rather than prosecution.

Advocacy

Free market economists Thomas Sowell and Walter E. Williams, among others, argue against laws that interfere with large price changes. According to this view, high prices can be viewed as information for use in determining the best allocation of scarce resources for which there are multiple uses. They, in effect, reject the term "price gouging," and argue that laws against price increases serve only to restrict supplies of a good or service by reducing the incentive suppliers have to undertake any additional costs, hazards or inconvenience that may be required. They argue further saying that these price increases force consumers to ration goods thus increasing the longevity of certain resources in an emergency. Problems during the 1870 Siege of Paris, which critics attribute to price restrictions, are often held up as an example. In the same vein, economists Jerry Taylor and Peter VanDoren state: "Gougers are sending an important signal to market actors that something is scarce and that profits are available to those who produce or sell that something. Gouging thus sets off an economic chain reaction that ultimately remedies the shortages that led to the gouging in the first place." This means that if there is a possibility to make large profits other suppliers would jump into the market and eventually drive down the prices to cost through normal price competition.

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