Monday, June 13, 2011

The Case Against Price Gouging Laws

Michael Giberson of Texas Tech University has written a nice readable essay on "The Problem with Price Gouging Laws." Part of the essay rehearses standard economic arguments over such laws, but with a nice variety of examples and discussion from both economists and philosophers. The case for price gouging laws, of course, is that raising the price for selling necessary goods during an emergency is morally offensive. But economists are congenitally open to the possibility that, upon deeper reflection, people's first quick reactions about what is "right" or "wrong" may be misleading.  Price gouging laws have the following predictable consequences:

Discourage bringing supplies into certain areas. As one example, there is a chain of convenience stores in Tennessee called Weigle's. It sells gasoline, and it buys that gasoline on the spot market--not under long-term contracts. In 2008, when Hurricanes Gustav and then Ike tore through the Gulf of Mexico and shut down oil drilling, Weigle's ran out of gas. They trucked gas in from other cities, but the extra costs meant that they raised the price of gas by about $1/gallon. This let to an investigation by the state attorney general, which was eventually settle without an admission of wrongdoing, but with a mixture of payments  to the state and consumer refunds. The next time a similar  situation arises, one wonders whether Weigle's  will choose to pay the higher costs of trucking in gasoline from other cities. In South Carolina during the same episode, a number gas stations apparently just closed their doors, rather than risk facing charges of price gouging. More generally, if you want people from the cities surrounding a disaster area to bring in ice and food and batteries and other supplies for sale, then you need to be concerned that price gouging laws will discourage them from doing so.

Discourage conserving on key resources. If prices rise during an emergency, people have an incentive to buy only what they need, and not to stock up. As a result, supplies will run out more slowly and remain available for more people. Imagine a situation in which prices of hotel rooms are not allowed to rise, at a time when many evacuated families are looking for a room. A large family might reserve two rooms at the capped rate, but decide to crowd into one room at a higher rate--thus leaving a room available for another family.

Concentrate economic losses on certain economic actors. Price gouging laws often impose costs on merchants, whose costs rise in times of emergencies. They impose larger costs on smaller firms, who have a harder time getting resupplied, than they do on large national chains that have a built-in ability to shift supplies from elsewhere.

Concentrate economic losses on the disaster area. One study sought to analyze what would have happened in the aftermath of Hurricanes Katrina and Rita, if price-gouging laws had been in place. It found that such a law would have caused greater losses in the disaster areas, because if would have discouraged suppliers in neighboring areas from bringing in supplies. However, the neighboring areas would have moderated any costs to the neighboring areas, because supplies from those areas weren't being shipped to the disaster area. A web of economic transactions acts as a mechanism for spreading costs of shortages over a wider geographic area.

Before reading this article, I hadn't realized that the creation and spread of price-gouging laws is a relatively recent development. Giberson writes: "The first state law explicitly directed at price gouging was enacted in New York in 1979, in response to increases in home heating oil prices during the winter of 1978–1979. ...
Just three states passed similar laws in the 1980s: Hawaii in 1983, and Connecticut and Mississippi in 1986. Then, 11 more states added anti-price gouging laws or regulations in the 1990s and 16 states followed in the 2000s. When price gouging laws are revised, the tendency is for the scope of the law to be broadened, the penalties to become more punitive, and the conditions under which the laws are applied to become less restrictive."