Have you noticed the prices of things you buy increase during the coronavirus pandemic? News articles have reported price gouging on toilet paper and personal protective equipment in the U.S., numerous essential items in the U.K., and several other goods worldwide.
What is price gouging?
Price gouging is the practice of offering to sell an essential item following a natural disaster or during a pandemic at a price much higher than its normal price. Several states in the U.S. and countries around the world have laws preventing price gouging.
Are price caps better than price gouging?
A price cap is one way to prevent price gouging. The price cap blocks the price adjustments that balance the quantity demanded and the quantity supplied. The efficient market outcome cannot be obtained if the price cap is lower than the new equilibrium price, so price caps are typically inefficient.
What happened to demand and price?
During the COVID-19 outbreak, the demand for essential goods such as toilet paper and Lysol wipes increased dramatically. Price caps prevented firms from adjusting their prices to meet the increasing demand. When the quantity demanded exceeds the quantity supplied, a shortage occurs.
What really happened to the price?
Individuals take advantage of an arbitrage opportunity. Arbitrage is the practice of seeking to profit by buying in one market and selling for a higher price in another related market. Consumers can buy lots of toilet paper at the capped price in a grocery store, and then sell the toilet paper at a higher price in a secondary market, like Facebook Marketplace, Amazon, or eBay. One couple in Vancouver made over $100,000 reselling Lysol wipes this way!
Let’s look at a graph of the toilet paper market.
Now take a short quiz to check that you understand what you just read.
Multiple Choice Test: COVID-19 and Toilet Paper