THE EDITOR: The increase in prices for a wide range of goods, particularly grocery items, has led to calls for government action against “price gouging” and even for price controls. If the Government takes any such action, however, this will only worsen the situation.
Economics has very few iron laws, but one of these is that price controls always lead to shortages. This was true 4,000 years ago in Babylon when the Code of Hammurabi fixed prices and wages, as it is today. Yet this principle appears unknown to most media commentators and, apparently, some university economists as well.
Prices are signals that tell producers and sellers how much of a particular good is wanted by buyers. This allows the market to keep supplying (with hiccups) goods to everyone with an income.
This is because Code of Hammurabi when retailers raise their prices on particular goods, fewer people will buy those items, hence the items remain available to more people.
If the Government prevents retailers from raising prices in times of emergency (or panic), then a few people will buy up all the items, creating shortages for most other consumers. We saw this at the start of the covid19 pandemic with toilet paper.
One consequence of price-gouging policies, therefore, is that those who do not have an income, or a very low income, are less likely to get essential goods through charity since there are fewer private citizens in possession of extra goods and government inefficiency and/or corruption channel price-controlled goods to a chosen few.