Is it wrong to stock up on hand sanitizer, and try to sell it at a profit? Would it be wrong for stores to increase the price of toilet paper and bottled water in response to the dramatically increased demand for those products?

Coronavirus has once again raised questions about the ethics of price gouging – a topic I’ve touched on before in the video above, and in more detail in this paper. But before diving in to the ethics, we ought to be clear on what that phrase actually means.

In essence, “price gouging” is simply a pejorative way of referring to the use of market prices to allocate scarce resources. It is rationing according to supply and demand.

Defining price gouging in this way has the advantage of making the moral problem clear. Price gouging occurs because resources are scarce – because there aren’t enough goods to meet people’s needs. Banning price gouging doesn’t do anything to address the underlying scarcity – in fact it might even make it worse, by destroying the incentives to bring new supply to market. So if we don’t want to allocate according to market prices, on what criterion should we allocate?

You might say that we should allocate on the basis of need. And that sounds plausible enough. If I had a limited stock of water to distribute among my four children, that’s probably how I would do it.

But need can be hard to perceive. Especially when you’re dealing with strangers. And especially when you’re dealing with people who realize that their chances of getting the water they want is dependent on their ability to make you believe that they need it.

In the end, allocation by market prices has two advantages over just about any other system of distribution. It leads people to cut back on their demand – especially those people who need the good less, and are therefore willing to pay less for it. And it encourages people who have excess supply – people who stocked up, people from non-affected communities, and producers who might be able to make more – to bring that supply to where it is needed most. Market prices work to meet people’s needs on both the demand and the supply side.

Prices might not be perfect. But they’re usually better than the alternative.