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Fill-in-the-Blank Article About Price-Gouging Laws

September 8, 2008

Tags Free MarketsLegal SystemInterventionism

[As surely as summer follows spring, natural disasters are followed by saber rattling about "price gouging," which is usually defined very lucidly and clearly as an "unconscionable" increase in the price of a necessity. These tend to follow a formula, so I thought that instead of writing a new article discussing the unintended consequences of every price-gouging law that goes into effect after a natural disaster, it would be useful to write a universal, fill-in-the-blank article discussing the economics of price-gouging laws. Whenever there is a natural disaster, you can just fill in the relevant blanks for a complete analysis of the economics of the situation.]

Fearing increases in the prices of basic items as a result of    (disaster)   , officials in    (state or municipality)    have declared a state of emergency whereby restrictions on "price gouging" are now in effect. According to    (politician or law enforcement official)   , the law is designed to protect innocent consumers from "unconscionable" increases in the prices of food, gasoline, ice, electric generators, and home-repair services. The unintended, unseen consequences, however, are predictable, unfortunate, and avoidable.

A disaster changes the value of necessities radically. Usually, the supply of a good — say gas — falls while the demand rises, which is a prescription for higher prices. Rather than reflecting opportunistic profiteering, large price increases reflect drastically changed conditions and tell people to economize on the use of essentials. Prices generally give accurate, truthful information about everyone's assessment of the value of a good or service at a point in time. If competition is allowed to take place, prices tell the truth. When governments control prices, governments force prices to lie.

Price controls and price-gouging laws make matters worse rather than better. Consider the case of    (hapless merchant)   , who was fined $___ and sentenced to ___(months/years) in jail for increasing the price of    (goods)    by ___%. The bitter irony is that    (merchant)   's    (goods)    were confiscated and taken to a secure location, where they    (rotted/melted/remain to this day)   . The citizens of    (town)    are still without    (goods)   , and the very person who tried to provide them with    (goods)    faces prosecution.

Large firms can deal with anti-gouging statutes without too much difficulty; indeed, as some executives have said, being there for the customer during their time of need is a way to earn customer loyalty. To head off possible price-gouging accusations, Wal-Mart has a policy of regional price freezes during times of crisis. This is an inconvenience for large firms like Home Depot, Wal-Mart, and others, and as the aftermath of Hurricane Katrina showed, large firms can score major public-relations points with nimble reactions to natural disasters.

Smaller operations are not so fortunate. Large companies like Wal-Mart and Home Depot have diversified, nationwide portfolios of stores whereas smaller concerns may have all of their assets exposed to the threat of a storm. If prices are held down by brute force, these firms might not find it worth their while to keep normal hours after the storm.

Even worse, firms may not decide to do business in disaster-prone areas at all. The prospect of high profits after natural disasters should attract firms to disaster-prone areas, but if they are not allowed to earn high profits after disasters, they might as well do business in safer environs. In addition, price-gouging laws show that state and local governments do not respect private-property rights. Government interventions tend to build on other government interventions, and if people can score political points by interfering with private-property rights, they will do so sooner than later.

I don't mean to be glib — far from it. Natural disasters wreak unspeakable human tragedy, and we can decide between interventionist policies that make things worse or noninterventionist nonpolicies that allow rapid recovery ("robust rebound," as it has been called by some scholars studying the post-Katrina recovery in New Orleans). The important point, as always, is that the restrictions on price gouging harm precisely the people they are supposed to help. And so it is in the wake of well-intentioned legislation aimed at helping the unfortunate victims of    (disaster)   : we see long lines as people try to secure limited supplies of basic necessities. A price control by any other name is still a price control, and price controls have always served to compound the miseries wrought by natural disasters.

 


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