Why some prices SHOULD rise in a crisis

Many people, already triggered by fear and stress during a natural disaster or crisis, react emotionally to the inevitable rise in prices of resources like gasoline, water, or toilet paper. But those price rises are a natural market reaction to increased quantity demanded (QD). The QD of vital resources will rise very predictably in a crisis situation and that QD increase can cause severe problems like stockpiling and shortages at a time when broad access to such resources is critical.

So how can we prevent the stockpiling resources we all need? A law? Economic incentives are a much better way and markets naturally employ them without the need to pass a law. And the best prevention is what the economically uneducated call “price gouging.”

As Cost Benefit Jr. covers in Lesson 8: an increase in the quantity demanded of a good will automatically increase its price. And this is a good thing! It’s an important, natural, self-regulating feature of a free market and it ensures that we are more efficiently allocating the supply of necessary resources and preventing their shortages.

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