Walter E. Williams Explains “Price Gouging” Myth | American Conservative Daily

Today on Facebook, I saw a complaint that pharmaceutical companies were raising their prices in advance of "reform". Maybe it's time to revisit the concept of "price gouging". Walter E. Williams Explains “Price Gouging” Myth | American Conservative Daily

Let’s start off with an example. Say you owned a small 10-pound inventory of coffee that you purchased for $3 a pound. Each week you’d sell me a pound for $3.25. Suppose a freeze in Brazil destroyed half of its coffee crop, causing the world price of coffee to immediately rise to $5 a pound. You still have coffee that you purchased before the jump in prices. When I stop by to buy another pound of coffee from you, how much will you charge me? I’m betting that you’re going to charge me at least $5 a pound. Why? Because that’s today’s cost to replace your inventory.

Historical costs do not determine prices; what economists call opportunity costs do. Of course, you’d have every right not to be a “price-gouger” and continue to charge me $3.25 a pound. I’d buy your entire inventory and sell it at today’s price of $5 a pound and make a killing.