Price Gouging Laws Hurt the Public

JULY 5, 2012

In the aftermath of a natural disaster you’ll routinely hear people complain that some business was engaged in “price gouging” – that they supposedly took advantage of the situation to charge people unreasonably high prices. In today’s society, like so much else, when people complain they want government to “do something.” After the recent storms, some Marylanders have turned to Attorney General Doug Gansler to punish supposed price gougers. Gansler notes that Maryland doesn’t have a price gouging law, so there’s little he can do, but that he supports enacting such a law. For the sake of people who are affected by storms, let’s hope he doesn’t get his way.

Like so many other laws, price gouging laws are intended to help the public (after all, won’t they benefit from lower prices during a disaster?), but, in reality, hurt us. Mike Munger, an economics professor at Duke, points out that when a hurricane hit North Carolina in the 1990s, that state’s price gouging law prevented him and others in his area from getting necessary supplies. Munger explains the economics using the example of a bag of ice:

Consider two prices. First, the price of ice before the storm, which most people know, or have a feel for. Second, the price of ice after the storm, which is unknown and highly variable. People who favor price-gouging laws think that the first price, the price before the storm, is the fair price, and that is the price they want to pay. The market price after the storm reflects both the difficulty of getting ice from stores, because the store has no electricity, and the huge bump in demand for ice as thousands try to buy it.

Clearly, the relative scarcity of ice after the storm is much higher. The market price rises rapidly to reflect this increased scarcity. This makes people who would have used ice at the old price economize, and use something else. They can drink their bottled water, or their Carolina Ale, warm if they don't want to pay $12 for a bag of ice. So ice only goes to people who really value it. And the higher price also signals yahoos, wahoos, and all sorts of regular folks that one can make boxloads of money by taking truckloads of ice to Raleigh. The price system is automatically doing its job, signaling to buyers that they should cut back, and signaling sellers (even potential sellers, those who have to enter the market from Goldboro) that they should sell more.

If enough people bring ice to Raleigh, of course, the price won't be $12, or $8, for very long. Ice is easy to make and transport, so without market restrictions price after the storm will quickly be driven down near the price before the storm, because there is so much more ice available. That's what the clapping people must have wanted. Even the supporters of price-gouging laws want low prices and large supplies. But they can't get those things from a price-gouging law. Precisely the opposite happens, as the supply of ice disappears and the effective price, what people would be willing to pay, goes higher and higher. I admit that it's not intuitive, until you think about it. The only way to ensure low prices, and large supply, to buyers is to allow sellers to charge high prices, the highest they can get.

Storms bring hardship but price gouging laws won’t help ease that hardship. In fact, they make disaster-related problems even worse. But these laws do empower politicians to look like they are “doing something” to help people. Politicians love laws like that. It gets their names in the paper and helps them seem compassionate. These politicians are, in fact, the only people who benefit from price gouging laws.

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posted by : qbgepsdl on May 20, 2013 at 01:26 AM

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