Class: Economics-Macroeconomics1 Read the \"Price Gouging\" article.. Based on w
ID: 1192318 • Letter: C
Question
Class: Economics-Macroeconomics1
Read the "Price Gouging" article.. Based on what you've studied in this course, explain at least one possible economical detriment of (problem with) the current law. You may add any other detriments, but you must provide at least an economic one). Note: Retailers being able to pass on wholesale price increases is not considered detrimental and so should not be your answer.
PRICE GOUGING
Definition of "price gouging": taking advantage of a lack of competition by selling at an especially high price.
Hurricane Ike was a recent reminder that the Texas attorney general accepts complaints of "price-gouging" during and after disasters. The following explanation can be found at the attorney general's Web site:
"Under Texas law, vendors are prohibited from charging exorbitant prices for necessities such as groceries, clothing, medical supplies, lodging, repair work and fuel during and after declared disasters. Although state law prohibits vendors from illegally raising prices to reap exorbitant profits during a disaster, it does allow retailers to pass along wholesale price increases to customers. Thus, in some cases, increased prices may not necessarily signal illegal price gouging."
Explanation / Answer
There is a logical flaw as follows.
State law prohibits vendors from "illegally" raising prices to reap profits during disaster. But does the law provide a framework to determine if a sudden exorbitant price hike is legal or illegal? That is, is the price hike warranted and justified by circumstances, or not? In absence of a clear definition of "legality", vendors can take advantage of this loophole in Texan law. They can raise prices by overshooting, then justify the price rise as warranted, therefore claiming it was a legal price hike, and accordingly pass on the increased price to final buyers.
Therefore, law must be amended to include the legal definition of "illegaly exorbitant" price hike, in absence of which vendors will keep exploiting the loophole of the law.