(Photo Credit: Jason Henry)
The reports of COVID-19’s rapid spread around the globe alarmed people and, as with any emergency, people took to the stores and started to buy. And buy. And buy. Just as suddenly as new cases of the virus were reported in multiple states, necessities such as toilet paper, water bottles, and hand sanitizer disappeared from the shelves of most stores, whether physical or online.
While many of these suddenly scarce goods were bought by panic buyers attempting to stock up on necessities before they were all gone, a portion of these goods was also bought up by people intending to re-sell them at a markup for a tidy profit.
This method of business is known as “price gouging” and people who partake in it are regularly declared “public enemy number one” in times of crisis. While this crack at a quick buck is often looked down upon by the general public, an argument can be made that price gougers perform a much needed public service.
The market for toilet paper can be used as an example to demonstrate this. In a perfect world, in times of national crisis, people would think of others around them and buy only what they need. However, panicked people are irrational and buy more toilet paper then they could use in a year. In this example, these people can be dubbed “hoarders” because they buy up more toilet paper than they need and refuse to share it with anyone else.
This creates a problem.
In a normal, non-emergency setting, the supply of toilet paper that is produced in factories and stocked up on shelves can keep up with the demand for toilet paper. However, when everybody panics and takes to the stores all at once, like in a pandemic, there is a spike in demand that the supply is not able to keep up with, which creates a shortage.
Due to this sudden spike in demand, any existing stock of toilet paper disappears off the shelves of stores just as fast as it is stocked. Not everyone is dedicated enough (or able) to arrive at a store hours before it opens to line up and buy half the store’s stock of toilet paper like the hoarders. Due to this dilemma, normal people undoubtedly find themselves with three rolls of toilet paper left and no way to procure more.
This is where the price gouger comes in. Because they are motivated by profits, they too will line up hours early and buy a large amount of this paper gold that would otherwise be bought by hoarders. However, unlike the hoarders, they are willing to share a bit of their stock for a price.
While it is immoral to sell these goods at a high price to people that desperately need them if they knew they were not going to make a profit from their venture, would they have gone out to the store in the first place?
Without such people, the world’s supply of toilet paper would be sitting in someone’s garage going unused, instead of in the hands of the general population. Moreover, the fact that people are still selling it at such a high price means that there are people out there that are willing to pay for it. I would assume that many people are more willing to pay $5 for a roll of toilet paper than to not have a role at all.
Another thing to consider is the price that these price gougers are charging for the goods they are pedaling.
The ultimate goal of a price gouger is to make money. The profiteer buys up a stock of toilet paper and tries to sell as much of that stock as they can at a markup. The higher the price a price gouger charges for a good, the less of that good they will sell. However, the price gouger only has a limited window of time to sell it.
Once the panic dies down and the demand for toilet paper returns to normal, the gouger is not going to be able to sell his stock. Why would someone buy an overpriced roll of toilet paper from an unknown, possibly sketchy seller when they can just go to the store and buy the toilet paper from a trusted vendor.
Taking this into account, let’s say that a price gouger buys 100 rolls of toilet paper for $1 each for a total expenditure of $100. If he charges $50 per roll of toilet paper, people are not going to buy it, so he is going to have spent $100 on 100 rolls of toilet paper and made $0. If he truly wants to sell it, he needs to charge a price people are willing to pay.
If he charges $10 per roll, perhaps 10 people will buy it, and maybe he will make his money back. However, he still has a lot of toilet paper left and he could still make more money.
Now let’s say he sells each roll for $5 each — 30 people each buy a roll and instead of $100 he is now making $150 even though he sold each roll for less.
Now let’s say he sold each roll for $2 each. He is still charging twice the amount he paid for each roll but now, everyone wants to buy toilet paper from him and he sells his whole stock. He has now made $200 from his $100 investment.
Again, the numbers in this example are a bit arbitrary but, the idea remains true. If they are smart, price gougers will lower the price to a point that many people will be willing to pay in order to make maximum profit.
The last thing that will be considered right now is the impact that this higher price will have on the use of this good. Because toilet paper is so much more expensive, people will think twice about just grabbing a handful of it instead of using the much more efficient fold method. The unfortunate reality of many large scale global emergencies is that the supply chains of many companies will be disrupted, meaning a decrease or complete stop to the flow of many goods.
The toilet paper manufacturer in China may have to scale down its operation because of sick employees. The shipping company may make less frequent trips across the ocean because of the overall decrease in the transport of goods. This in conjunction with a portion of the total supply being stored by hoarders means that the total amount of toilet paper that is accessible to the general population has drastically decreased.
Because of this shortage of toilet paper, the more efficient the ratio of wipes to trips to the toilet, the better. The high price of toilet paper acts as a natural way to slow down the consumption of toilet paper. While $0.01 a wipe may not mean much to a person, $0.50 a wipe definitely will.
While there are many more, probably better, proposed solutions to this problem of supply and demand, price gouging is not necessarily as bad as people make it out to be. Even though their intentions of making money off of the fear of others are certainly twisted, they inadvertently allow for a way to facilitate more equal distribution of goods.
Originally Published in the LA Times High School Insider.