The Cure to Price Gouging

Aug 1, 2022 | Finconomics 101

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Summary: A key economic assumption is that people will act in a rational manner. Producers will seek to maximize their income for the least amount of work and resources while consumers will seek to maximize the value of what they purchase for the least amount of money. So, it stands to reason that producers faced with the economic equation outlined in this table will choose to produce just 100 units in order to maximize their profits – assuming they can charge $5 per unit with no competitor willing to offer a lower price. For this to be the case, the producer would have to enjoy a monopoly over the market either through a natural condition (like the exclusive ownership of a rare earth mine or oil field) or through the illegal collusion with a few large “competitors” that agree to keep their prices high. Without a monopoly, the proper unit prices & profit levels should be determined by calculating a fair return on invested capital. In conclusion, the best way to protect consumers from price gouging monopolists is to encourage entrepreneurship & new business formation capable of driving price competition.

Price Gouging Graph

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