"Gouging" was an unfortunate choice of words, although I do think there are some situations were it is applicable. I start from the assumption that economic health depends upon making a wide array of purchases, because not only the consumer benefits by satisfying a greater number of wants, but the worker benefits by having his services required to make more items, and the investor benefits by having a more stable flow of profit over time.
From that standpoint, overpricing is bad because it unnecessarily absorbs resources in a smaller number of transactions, thus limiting the number of items purchased over time. It can be argued that it will come out in enhanced consumption, through paychecks and profits, but that ignores the adverse impact on other businesses, which may have to restrain wages or lay people off. The business profiting from its little monopoly, on the other hand, would not want to hire many more people, because that would create the danger of a glut, and cause the price to drop. Now, in most instances, this negative effect is trivial, but it has potential for real harm.
For example, think of a situation where staple foods, like bread and milk, cost hundreds of dollars. People are forced to pay, because they need to eat. Supposing that all who can afford it pay, there is no need to hire more people, and, in any case, if things are moving along well, one doesn't want to pay too much for storage and processing, only to risk spoilage in the end. Nevertheless, because everyone pays, there is almost no money for anything beyond shelter and food. Most other businesses begin to slash prices or fold, reacting anywhere for not giving raises to slashing payroll or laying of workers, assuming they do not file for bankruptcy. No one is happy, not the consumer, who is stuck with his staples in front of the tv (with, probably, no cable); not the worker, who is losing money one way or another, on average; and not the investor, who loses on an array of investments, and has little opportunity to invest in existing businesses, because they do not care to expand. The one person who might be happy is the entrepeneur, who sees an opportunity to undercut prices and still make a handsome profit, along with his backers. But you see, that only means that the solution is real competition.
This is a limiting case. Most attempts to exploit leverage will not be so severe, and will fail because the monopolistic conditions are local, and there are businesses on the horizon looking for new markets. Thus, it is usually not worth the anti- trust apparatus, and so forth. But it is potentially quite disruptive, and cannot be shrugged off.
As for gouging, assume an isolated town which gets its water from a clear lake that is solely owned by a mean old aristocrat who will not sell, because they cannot raise the cash that he can make over time by charging them exorbitant prices. It is so isolated that the costs of trucking in water are prohibitive. Of course, they can incur the costs of moving, after their businesses are ruined and they have nowhere else to turn. On the other hand, who would buy them out under those circumstances? Thus, the aristocrat has it in his power to ruin everyone. Now, it is not in his interest to ruin everyone, since he wants to be paid for his water. But it is in his interest to gouge them up to the point where they can get by, pay his fees, and not flee. Thus, he can be directly responsible for depressed economic conditions in the town.
In that case, recourse to political remedies is, I think, reasonable. For example, the town might tax the aristocrat in order to subsidize everyone else's consumption of the water, or might take over his property under the doctrine of eminent domain. Anyway, it is, again, a stark example of why gouging is theoretically possible. Most instances will be a good deal less severe, and will arguably have an economic rationale. However, one cannot absolutely rule out political intervention to stop exploitation of advantages that harm the community at large..... |
