Farnam Street helps you make better decisions, innovate, and avoid stupidity.

With over 400,000 monthly readers and more than 93,000 subscribers to our popular weekly digest, we've become an online intellectual hub.

Why Fiddling With Prices Doesn’t Work

The fact is, if you don’t find it reasonable that prices should reflect relative scarcity,
then fundamentally you don’t accept the market economy,
because this is about as close to the essence of the market as you can find.

— Joseph Heath


Inevitably, when the price of a good or service rises rapidly, there follows an accusation of price-gouging. The term carries a strong moral admonition on the price-gouger, in favor of the price-gougee. Gas shortages are a classic example. With a local shortage of gasoline, gas stations will tend to mark up the price of gasoline to reflect the supply issue. This is usually rewarded with cries of unfairness. But does that really make sense?

In his excellent book Economics Without Illusions, Joseph Heath argues that it doesn’t.

In fact, this very scenario is market pricing reacting just as it should. With gasoline in short supply, the market price rises too so that those who need gasoline have it available, and those who simply want it do not. The price system ensures that everyone makes their choice correctly. If you’re willing to pay up, you pay up. If you’re not, you make alternative arrangements – drive less, use less heat, etc. This is exactly what market pricing is for – to give us a reference as we make our choices. But it’s still hard for many well-intentioned people to understand. Let’s think it through a little, with Heath’s help.


To continue reading you must be a Farnam Street member or purchase a copy. (Current members can log-in here.)

To learn more about our membership options please visit this page or instantly sign up and become a Farnam Street VIP.

If you don’t want a membership but you do want to read this article, a copy is available for purchase.