Can prohibitions on “price gouging” reduce deadweight losses?
The vast literature on price controls says little about the way laws against “price gouging” differ from generic price ceilings, yet there is an important difference. By creating the foreseeable possibility (not certainty) of a shortage, a prohibition on price gouging may cause rational consumers to increase consumption. This has particularly interesting implications for markets with external benefits – expectations about policy-induced shortages may increase socially beneficial preparedness for times of acute scarcity (e.g., obtaining vaccinations prior to epidemics, keeping goods on hand in preparation for natural disasters). Thus, under some conditions, laws against price gouging may increase total surplus.
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