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Why price gouging can seem obvious to consumers but hard for economists to identify

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Consumers and politicians across the country are complaining about price gouging. But when do prices cross the line from market-rate to exorbitant — or even unethical?

STEVE INSKEEP, HOST:

As prices go up, so do complaints about price gouging. Inflation has been easing but is still a problem, and price gouging is not so easy to define. Here's Paddy Hirsch and Wailin Wong from NPR's daily economics podcast, The Indicator.

WAILIN WONG, BYLINE: Price gouging is not an economic term. In fact, a large proportion, maybe even most economists, say that price gouging isn't a thing at all. Amy Smith is an economist at Advanced Economics Solutions, a consultancy.

AMY SMITH: Price gouging - from an economist standpoint, the opinion is it couldn't exist because it's really all about supply and demand. I mean, you just go back to your Economics 101, right? If there's less of a good, then you got to increase the price in order to rationalize demand.

PADDY HIRSCH, BYLINE: In other words, the argument goes, it's not price gouging, it's the market. If demand is super high and supply is super low, then prices are going to rise, just as night follows day.

SMITH: So say a hurricane hits the Gulf Coast, there might be an issue with sending in products like toilet paper or plywood or something to that effect, and that would drive prices because the demand on something like that is high while supply continues to dwindle.

WONG: Now, I know what you're thinking. If there's a natural disaster and people really need toilet paper or plywood and a retailer charges a lot more for those things, that's kind of unethical or maybe even immoral.

HIRSCH: Yes. This is where Economics 102 comes in, and we learn about the power of a monopoly, which occurs when a company lacks any viable competition and can keep prices high.

WONG: But a hard-line economist might argue that it's not good for the economy - not good for anyone, in fact - to forbid retailers from increasing prices. Goods often cost more in a store because the retailer's supplier is charging more, and all the store owner is doing is passing along those costs. Natural disasters can be an existential threat to businesses as well as to the people who need what they sell.

HIRSCH: The problem, Amy says, is that price gouging is hard to define. And at what point did that retailer's price go from merely high to an outright gouge? Price gouging's a highly subjective concept.

WONG: Every state has different laws on price gouging, if they have laws at all, which means that in some parts of the U.S., price gouging doesn't exist, and where it does exist, it has a variety of definitions. In some states, retailers are allowed to pass on wholesalers' costs, and in others, they're not. It's a random patchwork of guidance that uses words like exorbitant, excessive and unconscionable with regard to pricing without defining what those terms actually mean.

HIRSCH: Yeah. The fact is that price-gouging laws and, therefore, the definition of price gouging are driven by politics, not economics.

WONG: And this is why right now you have a Rhode Island senator demanding an inquiry into egg prices and a California governor urging price-gouging penalties on oil companies. Lawmakers in those states have been deluged with complaints about corporations charging exorbitant, excessive prices for eggs and gasoline over the last year.

HIRSCH: The egg-gouging question has just gone to the Federal Trade Commission. The California gasoline-gouging initiative just made it to the state Senate. Politicians will now try to untangle that old knot between economics and ethics, the same one that the philosopher Plato wrestled with in his "Republic" more than 2,000 years ago. So this latest attempt to define price gouging - oh, it might take a wee while.

WONG: Wailin Wong.

HIRSCH: Paddy Hirsch, NPR News.

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