“What actually constitutes ‘an extreme pricing practice,’ typically referred to as ‘price gouging,’ has nothing to do with sound economic theory and shows no consideration of what constitutes efficient price formation or the role of prices in an economy.”
“A year ago it was toilette paper; today it’s gasoline. The products that are hoarded may differ, but the cause of these shortages is ultimately the same: price controls.”
In the wake of the cyber-attack on the Colonial Pipeline, Southeast public officials at all levels of government are pleading with consumers not to hoard gasoline. Yet consumers are topping off the tanks of every car they own, even if those cars will ultimately be sitting in the driveways.
And with widespread hoarding comes shortages and long gasoline lines, which, in turn, incites more hoarding….
Fact is, the same politicians, including my home state of North Carolina’s governor, Roy Cooper, are actually subsidizing and encouraging the hoarding they are haranguing people to stop by invoking misguided anti-price gouging laws.
North Carolina’s ‘Price Gouging’ Law
North Carolina’s current law against what the legislation refers to as “extreme pricing practices” during “states of disaster, states of emergency, or abnormal market disruptions” was enacted in 2006 in the wake of Hurricane Katrina to expand on the state’s original price gouging law, which was enacted in 2003.
The 2003 law only applied to the specific geographical area that the state government had officially declared to be in a state of disaster. Because of this, complaints of gasoline price gouging in the aftermath of Hurricane Katrina could not be investigated because there was no state of disaster declared in North Carolina.
What actually constitutes “an extreme pricing practice,” typically referred to as “price gouging,” has nothing to do with sound economic theory and shows no consideration of what constitutes efficient price formation or the role of prices in an economy.
Under the North Carolina statute a person is guilty of price gouging if, with “knowledge and intent,” a price is charged that is “unreasonably excessive under the circumstances.” The statute goes on to state that determination will be based on two criteria. The price increase would not be considered “unreasonable” or “extreme” if it could be “attributable to higher costs imposed by the seller’s supplier or other costs of providing the good or service during the state of disaster.”
The second criteria considers whether the prices a seller is charging may have been exceptionally low in the 60 days previous to the disaster declaration. If it was, then a significant price increase during the disaster also may not be considered “extreme.’ It should be noted though that the law only states that an average of prices for the previous 60 days will be examined, with no indication of how that average would be calculated or what exceptionally low means.
Of course, this makes it nearly impossible for a merchant to even know for sure whether or not he is breaking the law. But while the law’s vagueness makes it difficult for businesses to comply with, from an economics perspective that is not the real problem. Ultimately such laws, vague or not, distort the market and lead to anti-social behavior on the part of consumers.
It’s important to note that the term “price gouging” has no meaningful definition outside of whatever definition politicians ascribe to it. The expression can’t even be found in a typical economics textbook. In reality, what is being talked about is a normal market response, i.e., an increase in price, to sudden and usually dramatic increases in demand for certain products and/or decreases in supply.
Price Gouging Law Subsidizes Hoarding
In terms of public welfare and social order it is particularly important to allow the price system to work freely during what we might call abnormal times like we are currently experiencing. With the Colonial Pipeline disruption, upward pressure is put on prices from both the supply and the demand side of the market. In order to prevent shortages and long lines at the pump, prices should be allowed to rise as quickly as possible to reflect these new and changing market conditions. Instead, anti-price gouging laws prevent this from occurring.
In an attempt to explain the phenomenon that we experienced a year ago with toilette paper and other grocery store items, Bruce Conn, a psychotherapist from Coliseum Medical Center in Georgia, stated that “[hoarding] is an easy and cheap response…. It’s not a high-risk investment…and it’s an easy thing to do.”
Interestingly, Conn’s conclusion – that people hoard because it’s an “easy and cheap response” – mirrors the arguments of economists. In the language of economics, if the costs of hoarding, i.e., buying much more than you need and storing it away, are low relative to the perceived benefits, then people will hoard.
State laws that prevent so-called price gouging are keeping the costs of hoarding gasoline artificially low. As a result, they are subsidizing behavior that, while rational from the perspective of the gasoline buying public, is clearly not in the interest of the greater good.
When suppliers increase their prices in such situations, as opposed to everyday changes in supply and demand, the public response is typically moral outrage. Many proclaim that it is completely unfair that businesses should “take advantage” of people’s hardships by charging higher prices, and the morally loaded, but economically meaningless, term “gouging” is used to describe the behavior.
In response state governments typically invoke their price gouging statutes. But in putting the force of law behind this moral outrage, people become blind to the fact that such edicts–as with all price control laws–typically generate unintended consequences that do not promote the general welfare.
Anti-price gouging laws, in fact, subsidize hoarding, the exact behavior we are being told to avoid–in this case by keeping the price of gasoline too low. In an unhampered market, the process goes something like this. The increase in demand for gasoline is the result of people wanting to stock up on it, i.e., hoard it, in the face of uncertainties about their ability to obtain it in the coming days and not because there is a greater need for it now.
The market response would be for prices to rise, which makes obtaining the additional gasoline more costly and therefore reduces the impulse to hoard: to fill up all of your cars and some additional 5 gallon cans to boot.
As prices go up in the face of this increased demand, hoarding becomes less of a “cheap and easy” option, as Mr. Conn put it, creating an incentive to purchase only what one needs (or at least to hoard less).
Ultimately these higher prices are what prevent shortages and closed gas stations. The higher prices brought about in times of emergency are not about the greed of businesses but rather about protecting consumers from the hoarding behavior of their fellow citizens.
Also, the higher prices help to ration what could turn out to be reduced supplies over time. For example, if gas station tanks cannot be restocked immediately the gas that is conserved, not hoarded, will be available during this period to those who really need it. And assuming that prices continue to be allowed to efficiently reflect the conditions of supply and demand, shortages will not develop.
Also, at the higher prices caused by this increased demand, businesses will have the opposite incentive. It will become more profitable for them to find innovative ways to increase their inventories where and when possible. The higher prices encourage the desirable behavior on both sides of the market.
But the price-control laws that are in place prevent this from happening. As some people begin to hoard, shortages that would otherwise disappear as prices increased instead persist. Seeing the long lines at gas stations, panic buying ensues, and the hoarding becomes a bigger problem. This occurs because of the price controls and it happens every time that a state of emergency is declared. A year ago it was toilette paper; today it’s gasoline. The products that are hoarded may differ, but the cause of these shortages is ultimately the same: price controls.
When state governments are waiving regulations and, in some states, suspending the collection of gas taxes in an attempt to make the delivery, purchase and sale of gasoline easier, they should be similarly waiving price control regulations that are having the effect of encouraging people to hoard gasoline, generating shortages, and keeping many people from obtaining the gas that they may desperately need.
Roy Cordato, Senior Economist Emeritus at the John Locke Foundation, is author of ““Excises, Social Costs, and the Myth of Efficient Taxation: The Case of Carbon Taxes (1992) and other classics in free market thought. He is also Lecturer at the School of Public and International Affairs at North Carolina State University in Raleigh.
Cordato holds an M.A. in urban and regional economics from the University of Hartford and a Ph.D. in economics from George Mason University. He also holds a Bachelors of Music Education from the Hartt School of Music.
In the kitchen, Dr. Cordato has mastered the “holy trinity” of soffritto, odori, and battuto from recipes of his ancestor’s native Italy.
His full biography is here.