Reason Interviews

Michael Munger Says 'Price Gouging' Gives Us Information We Need

Such laws end up causing more shortages than they solve, especially during a crisis.


As the COVID-19 pandemic prompted shoppers to clear supermarkets of toilet paper, rice, and canned vegetables, Matt and Noah Colvin loaded up a U-Haul with all the hand sanitizer and antibacterial wipes they could find, then attempted to resell the goods on Amazon at a massive markup. Soon after, the online retailing giant banned the practice, state attorneys general started cracking down, and the Colvins were shamed into donating the items.

But is so-called price gouging always a bad thing? Reason's Nick Gillespie spoke via Zoom with Michael C. Munger, who teaches economics, political science, and public policy at Duke University, about what happens when governments mandate that the prices of scarce goods be kept down. Munger says such laws end up causing more shortages than they solve, especially during a crisis.

Q: You are an unapologetic defender of price gouging. Can you explain why?

A: It's not clear that I would defend price gouging in all instances. Much of what we call "price gouging" is a guy telling an elderly person, "This tree in your yard is going to fall down. We'll cut it for you for $300" and then [giving him or her] a bill for $2,000. Much of what is enforced as price gouging is, in fact, fraud.

So let's take out fraud and recognize that we're in a circumstance of really great scarcity, and let's think about what the price mechanism does. If the price of something goes up and there's a shortage, three great things happen: The first is that consumers buy less. They look at that price and they say, "You know, somebody else must need this more than I do," and so they leave some for the person behind them. The second thing is that producers try to find ways to make more. And the third thing is that entrepreneurs try to find ways to make substitutes.

Q: But people were like, "There is a good chance we're going to be told not to leave our houses again. There is a good chance that trucks are not going to be replenishing grocery store shelves. We went to buy toilet paper because we don't know the next time we'll be able to." What are consumers supposed to substitute for toilet paper? And how long does it take a place that makes computer paper to switch over to making toilet paper?

A: The premise of your question is: Suppose you're in a situation where the things that I've talked about are unlikely to be able to happen. If this is really all that we're going to have [of something], and we're trying to allocate a scarce resource among a bunch of people who want it, then it seems like a pretty good objection [to price gouging] that only rich people can buy it. If there's a circumstance where this really is all there is, I can see an argument for some other mechanism for rationing.

On the other hand, you can still go to the grocery store. And if you've been to the grocery store lately, at least in Raleigh, where I live, there's plenty of toilet paper.

Q: What were your first thoughts when you heard government officials saying, "We have to impose price controls immediately." 

A: I think from a political perspective it was a genius move, because they can't do anything that actually helps [fight] the virus or [provide] access to health care. They don't have enough testing kits. They screwed this up. What they can do is say, "We're going to protect people against price gouging."

My own senator, Sen. Thom Tillis, told me to my face, "I'm a libertarian." Yet Thom Tillis has introduced a piece of federal legislation to outlaw price gouging. Not only does that ignore the 10th Amendment, it also ignores the fact that not all states are equally affected by this. Some states really are desperate for some of these items. High prices say, "Bring it here. We need it more than you do."

Q: From a libertarian perspective, what is the role of the federal government in a situation like this pandemic? 

A: We're going to be able to talk about this for the rest of my life in class. I don't know the answer to your question.

Q: Come Christmastime, where do you think we'll be as an economy? 

A: We're going to test a lot of the theories that Keynesians have about ways to try to spur the economy. We may see a big increase in the rate of growth of the money supply. We may see a bunch of fiscal policy. And we're probably going to get one or more of those things wrong. So: a big increase in debt or a big increase in inflation.

This interview has been condensed and edited for style and clarity. For a podcast version, subscribe to The Reason Interview With Nick Gillespie.