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Don't Prohibit Price Gouging

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Don't Prohibit Price Gouging

September 7, 2017

One of the devastating effects of natural disasters, such as hurricanes, is that they create shortages in everything from bottled water to plywood. The lack of access to these goods can make it hard for people to weather these events.

In response to increased demand, sellers sometimes increase the prices of the goods they are selling before or after the natural disaster hits.

Opponents of this practice refer to it as price-gouging, and many states outlaw the practice. However, these laws may exacerbate shortages and lower the propensity of more goods being made available. They may end up reducing overall access to goods in the wake of a natural disaster.

Following Hurricane Harvey, Texas Attorney General Ken Paxton said his team had received over 500 complaints of price-gouging. Paxton dismissed concerns about shortages saying, “I don't think as large as our country is, as large as Texas is, that supply is ultimately going to be that big of an issue.”

On Monday, Florida Attorney General Pam Bondi activated the state’s price-gouging hotline in anticipation of Hurricane Irma, saying Floridians “should not be inhibited by unlawful price increases on supplies necessary to brace for a major hurricane strike.”

Banning optimal pricing, or price-gouging, imposes a price ceiling on those affected goods. Artificially low prices can lead to hoarding, as there is no longer a price deterrent to “loading up” on bottled water, for example, before a natural disaster. This could lead to those essential goods ending up in a more concentrated manner than if prices had been allowed to fluctuate, and people in need could have even less access to them. Price ceilings can also shift costs from easily observable channels such as prices to nonmonetary costs such as wait times.

At the same time, not allowing sellers to alter prices in response to demand reduces their propensity to make more of those products available by bringing in more resources to the area. If stores were able to charge more, supplies would flood in from other parts of the country. It would be worth it to transport the additional supplies from other regions even if the transportation costs were substantial. Otherwise, demand is likely to outstrip supply, leading to empty shelves and a lack of access.

Many state price gouging laws are vague, creating uncertainty for sellers. For example, the Florida statute dictates that a price is unconscionable if there is a “gross disparity” between the price charged and the average price offered in “the usual course of business during the 30 days immediately prior to a declaration of a state of emergency.” Sellers are not certain what constitutes a violation of this statute, and operate under an additional cloud of uncertainty surrounding a natural disaster, worrying that they could violate the prohibition.

Price-gouging laws do not mean that there is no longer any form of rationing, it just shifts the channels of that rationing, and could even reduce overall access to the goods in question. In Florida, the price-gouging laws have not prevented physical altercations as people scramble to try to prepare for the storm.

As Tyler Cowen notes, visibility of these different forms of rationing might explain part of why politicians tend to favor price-gouging laws. A picture of bottled water being sold for an exorbitant price generates more backlash than a picture of a stores empty shelves, leading politicians to try to limit prices.

In the Journal of Competition Law & Economics,  W. David Montgomery, Robert A. Baron, and Mary K. Weisskopf of consulting company CRA International estimate that if national price-gouging legislation had been in effect for Hurricanes Rita and Katrina, the “economic damage would have been increased by $1.5-2.9 billion.” The surrounding states would have borne the brunt of these costs.

The market for goods is not the only force working to bring food, water and other goods to areas in need surrounding a natural disaster. Civil society, volunteers, charities, and philanthropic efforts by companies all do what they can to help out, but there are limits to their efforts.

If, as AG Ken Paxton posited, as large as our country is, there should not be any supply problems surrounding a natural disaster, there should be no need for price-gouging prohibitions. People would not buy goods at elevated prices if there were an abundant supply. If instead, natural disasters do disrupt the supply of goods and create shortages, allowing prices to rise would deter hoarding and encourage sellers to bring more supplies—eventually reducing prices.  That, after all, is what consumers want.

Charles Hughes is a policy analyst at the Manhattan Institute. Follow him on twitter @CharlesHHughes

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