Posted BY: Teresa | NwoReport

Friends and family are talking, on Facebook, about the rapid rise in the price of eggs. Their posts also report that there are plenty of eggs in the dairy sections of local grocery stores. A few people, along with some reporters, blame this rapid increase in the price of eggs on price-gouging corporations.

State governments take price gouging seriously. Section 396-R of New York’s General Business law defines price gouging as “unconscionably excessive pricing of essential goods and services during any abnormal disruption of the market, such as severe weather, power outages, strikes, or national or local emergencies.” This law also prohibits price gouging “by all parties in the chain of distribution, including retailers, manufacturers, wholesalers, suppliers, and distributors.”

Price gouging in a free, open market is a myth concocted by people who benefit from state interventions. When demand for a good suddenly jumps, for whatever reason, the price and quantity sold increase. If the supply of a good suddenly falls, the price rises as the good become scarce. Prices increase even more if rising demand and scarcity occur simultaneously. In all of these scenarios, there will be plenty of eggs in the dairy section of grocery stores provided markets are allowed to adjust. Adjustments, however, will result in higher prices, which encourage consumers to economize or seek substitutes.

Could rapidly rising prices be the result of firms colluding or merging to become the sole supplier of a product? Yes, but only over a short period when there are no substitutes. A sole supplier, in either form, does this by restricting output, which pushes the price up, results in above-normal profits, and attracts entrepreneurs who see a potential entry point. If entrepreneurs are free to innovate and profit from their efforts, they will jump into this market.

A fascinating example of this is Phil and Jenn Tompkins’s business. It rents egg-laying chickens to consumers. Its sales are booming. Consumers save money by gathering freshly hatched eggs from the rented hens in their backyards rather than buying expensive eggs from grocery stores.

Since price gouging cannot occur in free markets, even when firms collude or merge with their competitors, it follows that government intervention must be the cause of rising prices.

If a price increase is substantial, some voters will demand their representatives act. Legislators that blame corporations call for taxes on the “windfall profits,” consumer subsidies to offset higher expenses, or capping prices at previous lower levels. None of these proposals would lower prices. A windfall tax pushes prices even higher by reducing supply. A consumer subsidy does the same by boosting demand. A price cap would result in a shortage—no eggs in the dairy section—as consumers would demand more than firms can supply at a level that generates a minimal return on investment.

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Despite these realities, legislators intervene in markets by creating product and service scarcities on one side of transactions and excessive money growth on the other.

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