September 15, 2018 Reading Time: 6 minutes

Price “gouging” is charging a high price for something consumers really need, in an emergency situation. Some folks consider the prices of beer at NFL games (at Oakland’s Alameda Coliseum, $10.75 for 12 ounces), or popcorn at movies (often $10, or more, for a large), to be “gouging,” but those are just local monopoly prices for non-essential items.

Real price gouging is often illegal. Anti-price-gouging (APG) laws have three parts: the trigger, the domain, and the limit. Here is the money part of the statute from my beloved home state, North Carolina:

§ 75-38.:  Upon a triggering event, it is prohibited… for any person to sell or rent or offer to sell or rent any goods or services which are consumed or used as a direct result of an emergency or which are consumed or used to preserve, protect, or sustain life, health, safety, or economic well-being of persons or their property with the knowledge and intent to charge a price that is unreasonably excessive under the circumstances.

In this case, the “trigger” is the declaration of a state of emergency by the Governor, or an “abnormal market disruption,” which according to the statute  means “a significant disruption, whether actual or imminent, to the production, distribution, or sale of goods and services in North Carolina, which are consumed or used as a direct result of an emergency or used to preserve, protect, or sustain life, health, safety, or economic well-being of a person or his or her property.”

This could be caused by “a natural disaster, weather, acts of nature, strike, power or energy failures or shortages, civil disorder, war, terrorist attack, national or local emergency, or other extraordinary adverse circumstances.”

The ”domain,” as you can see in the text of the law, is “stuff you really need.” So if you charge a really high price for ice, which people without power need, you’d be doing something covered by the law. If you raised your price for the kind of “ice” my wife likes to wear around her neck, and on her wrists, no problem. (Note: My wife just told me that diamonds are actually more of an essential item; no one ever said that “frozen water is a girl’s best friend”!)

That leaves the “limit”: if the law is triggered, and for commodities or services in the domain, how much can sellers raise price in the face of scarcity? The answer is quite clear:  sellers can’t charge a price that “unreasonably excessive under the circumstances.”

So, the price can be unreasonable. It can even be excessive. But it can’t be unreasonably excessive. That’s actually not clear at all. Apparently, the concrete interpretation of this phrase is 5%, or perhaps 10%, depending on the “circumstances.” If you raise your price more than 10% in the face of an emergency, you are “gouging,” it seems.

There are 34 states with APG laws, and few others have statutes that could be used that way by an enterprising attorney general.  And the laws are popular; there is no movement to loosen the laws, and it appears that large majorities of voters actively favor the laws as they are.

Three Huge Issues

But there are three problems with APGs.

1.  Misallocation. Some people need products or services more than other people need them. But if the price is kept artificially low, there is no reason for the person with mild needs to leave some for those still waiting in line, or who will come looking tomorrow for the product.  With APGs, the first few people who go to the store buy everything up. APGs, in other words, encourage hoarding rather than sharing.

There’s a joke that my good friend Russ Roberts, of Econtalk fame, put up recently on Twitter. A guy goes into a store, to buy some milk. But the milk is $8 per gallon. So he complains to the owner: “$8! That’s too much!”

The owner replies, “So, buy it at the store across the street. That guy is only charging $4.”

The buyer shakes his head, “I can’t, he’s out of milk.”

The owner nods, “Right. And as soon as I’m out of milk, I’ll be able to charge $4, too!”

The point is obvious: it’s better to be able to buy milk at $8 than to be out of milk at $4. The low price for things that aren’t available is no price at all.

2.  Discourage Stockpiling Beforehand. Say there’s a hurricane coming. If you know that people really want milk and bread and other staples to “stock up,” stores could fill their warehouses with needed supplies. That’s expensive, and sometimes the hurricane changes course at the last minute, leaving the sellers with a lot of wasted stock. With APGs, there is no advantage to stockpiling, because you can sell things at the regular price anywhere. 

3.  Discourage New Supplies Afterward.  This is by far the worst problem, and the one that APG supporters seem least to understand. The problem is actually not high prices, but scarcity. There is not enough of the desperately need products and services, and if—by assumption—there is an emergency where we should be doing everything possible to get as much of those supplies delivered, as fast as possible.

For example, it is common to recognize that many people want portable electric generators after a hurricane, because the power goes out. They don’t buy one in advance, because they are pretty expensive and no one is sure the electrical grid will go down until it’s too late to bring more generators in, in the face of the oncoming storm. (Stores could stockpile beforehand, of course, but see #2 above.)

The hard thing for most people to understand is that only way to get plentiful supply at low prices is to allow high prices. High prices are a signal that more is needed, and that people serving that desperate demand can be paid enough to make it worthwhile.

But APG laws block this channel of resupply, as effectively as an enemy army might lay siege to a city. A “siege,” after all, is when a military unity surrounds a city and prevents needed supplies from getting through.  APG laws actually require state and local officials to lay siege to cities. That would be an act of war if another army did it, but when we do it to ourselves it’s just “public policy.”

Consider this account by AEI’s Mark Perry, in 2017, describing the aftermath of Hurricane Katrina:

Let’s use the actual example of John Shepperson of Kentucky, who in 2005 took time away from his normal job to buy 19 generators, rent a U-Haul truck, and drive it 600 miles to the Katrina-damaged area of Mississippi. John offered to sell his generators at twice the price he paid, to help cover his costs and make a profit. Instead his generators were confiscated, Shepperson was arrested for price gouging, held by police for four days, and the generators kept in police custody. They never made it to consumers with urgent needs who desperately wanted to buy them.

Who would have been harmed by the lifting of the siege, meaning that Shepperson, and thousands of other entrepreneurs, had been allowed to sell generators? Presumably, we are concerned about the consumers who would have paid Shepperson’s high price, right?  It’s as if they went to Shepperson, and said that his price–$1,000—was “too high.” Shepperson might have said, “Well, go over to the hardware store across the street. Their price is $500.”

The consumer would have said, “Yes, but they don’t have any generators.”  Well, right. The alternative for the consumer is not being able to buy a generator at the price prevailing a week ago, before the hurricane. The alternative for the consumer is to go without a generator, when the consumer actually values the generator at more than $1,000, maybe much more.

You might object, “What if the consumer does not value the generator at more than $1,000?” Fair enough. She won’t buy one. But she didn’t have one anyway; for her, in terms of value, “no generator” is the solution regardless of the public policy in place.

The difference is that if APG laws are repealed, those people who do value the generators at more than $1,000 can actually buy one.  Let me be clear about the two possible conditions:

Condition I (APG law in place): There are no generators available, regardless of how much consumers want one. People with low valuation can’t buy generators, and people with high valuation can’t buy generators.  Everyone must evacuate.

Condition II (APG law repealed): There are many generators available, because people are bringing them in from surrounding areas. But the price is high; people with low valuation don’t buy generators. People with high valuation do buy generators, however, and are able to stay in their houses instead of evacuating.

The bottom line is that people with low valuation (and that does include people who really want generators but are too poor to be able to afford the high price) don’t get generators under either condition. The problem is not high price, but scarcity: there aren’t enough generators, given the emergency.  Imposing an APG law makes the problem of scarcity worse, and does nothing at all to help poor people because APG laws eliminate all incentive to bring in generators from outside.

Of course, one might object that charities, or the state, might supply the emergency goods and services. And to some extent that’s true. How could we tell if there is enough? The answer is “price;” if charities and emergency management officials bring in enough supplies, then the price will be driven down to the point where everyone can afford what they need.

But that means that APG laws are unnecessary, and in fact moot. The joke is not funny if the price-gouger says, “Go across the street to the FEMA truck; they are giving milk away for free.” The consumer would say, “Okay, I will!” and leave the store.  What that means is that APG laws are unnecessary (if the state is as efficient as you think it is) or harmful and dangerous (if the state is as inefficient as I think it is, suggesting private solutions are helpful).  Either way, APG laws are either useless or harmful.

Michael Munger

Michael Munger

Michael Munger is a Professor of Political Science, Economics, and Public Policy at Duke University and Senior Fellow of the American Institute for Economic Research.

His degrees are from Davidson College, Washingon University in St. Louis, and Washington University.

Munger’s research interests include regulation, political institutions, and political economy.

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