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‘Price Gouging’ Law: Why Waste State and Consumer Resources during Emergencies?

[Ed. note: This post follows yesterday's post by Donald Hertzmark challenging a call for federal price controls on energy.]

The spectacular problems that beset the Federal Emergency Management Agency (FEMA) after Hurricane Katrina have led analysts of weather emergencies to look elsewhere for leadership, or even evidence of competence.

Increasingly, that leadership has been found prominently in the private sector: among companies being recognized for their emergency response capabilities are big box retailers like Walmart and Home Depot and the regional restaurant chain Waffle House.

One reason that some government agencies may be failing is that their attention is directed to the wrong things. High on that list is policing against high prices during emergencies. Basic economic analysis finds that price gouging laws end up wasting state government resources and wasting consumers’ time during emergencies.

New Jersey re Hurricane Irene

If you review official announcements in the days surrounding Hurricane Irene, you’ll notice that in some states much emphasis was placed on warning merchants against price gouging and encouraging consumers to report “suspicious price increases.”

Just before Hurricane Irene came ashore, the State of New Jersey thought it importantto urge “consumers to be alert for potential abuses including gasoline price gouging, home repair scams, and fraudulent charity solicitations.”

Subsequently the state reported receipt of 103 consumer price gouging complaints, which the state duly investigated. The investigation ended up finding no stations guilty of price gouging, though three stations allegedly violated the state’s law against changing gasoline prices more than once in a 24-hour period. The three stations have been cited by the state.

Several persons died in New Jersey due to flooding, and the damages may reach “billions of dollars” according to Governor Chris Christie. These are real emergency issues. In response, among many other actions, the state had investigators out counting how many times gasoline stations may have changed prices within each 24-hour period since the emergency was declared.

Maryland’s Experience

But, you protest, without the anti-price gouging law and attempts to enforce it, New Jersey residents would have been held hostage by greedy gasoline retailers anxious to exploit consumers in peril.

Really? Neighboring Maryland doesn’t have a law against price gouging. Anyone notice Maryland consumers being exploited by greedy gasoline retailers?

Gasoline retailers are well aware that sharp increases in prices during emergencies can spark considerable consumer protest, and retailers know that offended consumers can have a long memory. With or without a price gouging law, most gasoline retailers will keep any price increase to the minimum they think necessary.

Other Reasons to Desist

There are many other good reasons not to pursue price gouging complaints. One is stated in the title of economist Art Carden’s piece, Price Gouging Laws Hurt Storm Victims.

Emergencies frequently interrupt supplies at the same time that consumer demand abruptly rises. Some consumers need added gasoline to evacuate, and others needed fuel for portable generators. Power outages had some gas stations in the dark, shutting down their gas pumps, and cutting off their supply. In the absence of price increases, the supply and demand changes will be met with localized shortages which usually bring gasoline lines at the stations with fuel available to sell.

Waiting in line for gasoline is about as useful a response to an emergency as sending out state investigators to count the frequency of gasoline price changes, but with spot shortages and prices unable to go up to limit demand, gas lines and waiting are almost inevitable.

Most retailers are naturally reluctant to raise prices during emergencies, and state laws against price gouging only increase that reluctance.  As a result, consumers end up stuck in gas lines when they have much more important things to do, and state governments have an obligation to follow up on consumer complaints when they, too, have much more important work elsewhere.

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Note: For more on price gouging, see Giberson’s article in the Spring 2001 edition of Regulation magazine and his op-ed appearing in the Washington Times on June 6, 2011. In addition, Giberson blogs frequently on price gouging law at Knowledge Problem.

3 comments

1 Price gouging laws wasted resources during the Hurricane Irene emergency « Knowledge Problem { 10.04.11 at 2:23 pm }

[...] a post at the Master Resource blog I point out another problem with anti-price gouging laws: during actual emergency conditions both state governments and consumers likely have much more [...]

2 Kermit { 10.04.11 at 5:39 pm }

Usually, in Louisiana there may be one confirmed case of a business “gouging” customers. That is what percentage? It sure cannot even come close to 1/1oth of one percent, not even 1/100th of one percent.

3 Ed Reid { 10.05.11 at 8:17 am }

Mike focused on gasoline, as do most state AGs. However, that is only part of the issue.

Many in-market retailers might be able to acquire additional quantities of needed equipment and supplies following an emergency, though at additional cost. However, if they then increased prices to maintain margins, they would run the risk of an AG lawsuit. It is far easier and less risky to just “run out”. Unfortunately, that deprives consumers of the opportunity to purchase needed equipment and supplies, albeit at a higher than normal price.

“Price Gouging” laws also discourage the activities of the “spontaneous entrepreneurs” who buy a truckload of needed equipment and/or supplies out-of-market and bring them into the market for sale after an emergency. Their costs are far higher than the normal costs of in-market retailers, so their prices must be higher to permit cost recovery plus a return on their effort and risk.

The ultimate question regarding “price gouging” is whether the consumer is better off having the opportunity to buy needed equipment and supplies, even at a higher price? We are dealing with a “willing seller” and a “willing buyer”, since the buyer is not “compelled” to purchase at the higher price and would “do without” otherwise anyway.

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