Why Sound Arguments Against Price Gouging Laws Fall on Deaf Ears

By Jay Richards Published on September 8, 2017

As sure as night follows day, the media start reporting on “price gouging” as soon as a hurricane comes ashore. After Harvey hit the Texas coast, the attorney general was quick to warn merchants about the state’s laws against price gouging — that is, charging too much for goods. With Irma, the stories have started days before the hurricane hits our shores. 

And as sure as day follows night, folks who grasp economics explain why laws against price gouging are stupid. Prices need to go up, even way up, during such disasters to avoid shortages.

And no one persuades anyone. Here’s why.

Why Prices Should Rise

If you know what prices do, you know why they need to go up during crises.

“Prices should rise during emergencies,” John Stossel argues. “Price changes save lives. That’s because prices aren’t just money — they are information.”

For instance, a price spike on water and gasoline in Houston signals to suppliers that people want water and gasoline more there than in, say, Sioux City. These signals draw more suppliers to hazardous and needy Houston rather than to safe and settled Sioux City.

Prices will also go up in Sioux City (as they already have everywhere), though not as much as in Houston. The result? More gas and water go to the places they’re most needed. (See this great video explanation.)

Higher prices also coax consumers to conserve. High prices on bottled water and gasoline discourage the first customers from hoarding. That leaves more for others.

In the same way, if the prices on hotel rooms triple along evacuation routes, big families will opt to sleep on pull out couches and roll-away beds rather than rent a block of rooms. That leaves more space for other people. If the prices didn’t go up, the first people who book rooms will get them, and leave fewer rooms for others.

Politicians can’t guess the market prices for everything ahead of time. So there’s no way for them to know what amounts to “gouging.” Florida law defines gouging as a price that “grossly exceeds the average price during the previous thirty days.” Which means, of course, that the attorney general looks at allegations on a “case-by-case basis.” That, by definition, is bad law. 

In short, if politicians set ad hoc price ceilings on water, gas, hotels, etc. during disasters, they could create a shortage in the area most in need of these things. Shortages are bad anytime. But they can be a matter life and death during an emergency.

It doesn’t seem to occur to anyone that exploiting people in an emergency and laws against price gouging are both wrong.

This is Econ 101. Supply drops. Demand spikes. Prices go up, while competition keeps them from going too high. In a market, prices reveal underlying supply and demand. Government price controls, in effect, scramble price signals. They force prices to lie.

Conclusion: If you want needy people in Houston and Florida to get what they need, let prices do what they need to do.

What are You, a Robot?

The argument is simple. It’s also the sort of Mr. Spock logic that drives a lot of people crazy.

Michael Miltzik spoke for many when he wrote in the LA Times, “Memo to economists defending price gouging in a disaster: It’s still wrong, morally and economically.” It’s clear that Miltzik doesn’t get the arguments he’s attacking. But he’s right on a narrow point: Morally, it’s wrong to exploit people in an emergency.

That moral truth makes it hard for most folks to process the arguments against price-gouging laws. This may be why these arguments go nowhere.

To make matters worse, some of the econs who criticize anti-price gouging laws treat “price gouging” as a good thing. That’s what Tim Worstall did at Forbes last week, though his piece has since disappeared. I get the argument. But here’s what that sounds like to most readers: “It’s good to exploit people in an emergency!”

But it’s one thing to say prices should be allowed to signal real supply and demand. It’s another to endorse taking advantage of people in dire straits. If they want to persuade people rather than just refute bad arguments, econs should work harder at answering people’s moral concerns. 

It doesn’t seem to occur to anyone that exploiting people in an emergency and laws against price gouging are both wrong.

Economic truths aren’t suspended during an emergency, but they’re only part of the picture.

Secretary of Energy Rick Perry may have been thinking this when he reportedly said last week “that even though gas prices will increase because of supply issues, retailers should be wary of inflating prices unfairly.” In other words, basic supply and demand will cause prices to go up at the local Exxon station. But some merchants might raise prices much higher just because customers will be desperate.

Yes, the overall effects of their actions may be good — more water, gas and hotel space for more people. But that doesn’t mean, as a private moral matter, that literally taking advantage of people is right. God knows and cares about what we do and why we do it. At the same time, just because it’s wrong to take advantage of people doesn’t mean laws against price gouging will help people.

What We Do in Emergencies

Economic truths aren’t suspended during an emergency, but they’re only part of the picture. FEMA kicks into high gear. The Coast Guard moves in. Emergency shelters open. In Texas, the whole national guard was called up. The president and vice president have gone to the Lone Star State to comfort victims. Police and firefighters have gone above and beyond the call of duty. Firefighters from other parts of the country have rushed into the danger zone.

That’s just government actions. Celebrities have also donated money to aid groups. Churches have become rescue shelters. Neighbors have rescued neighbors. Monster truck drivers have helped the National Guard. And the “Cajun Navy” has reminded us of the many decent Americans we don’t otherwise see on the evening news. Most of this has little to do with normal market exchange. People are focused on survival, not trade. That context of charity and help matters.

https://www.youtube.com/watch?v=tK7KnXWRuUA

 

Exploiting People is Bad Business

 That’s why, for a business with long-term plans, even appearing to exploit customers in an emergency is double dog dumb. A smart company will do just the opposite.

How many millions of us have seen the story of the Spencers, an elderly Houston couple whose home started to fill with water? The husband, J.C. Spencer, called his favorite Chick-Fil-A for help. “I ordered two grilled chicken burritos with extra egg and a boat,” he later explained. The manager at Chick-fil-A sent her husband with a boat to rescue the Spencers. We know the story because it ended up on ABC’s Good Morning America and the whole internet.

You can’t buy that kind of publicity.

Contrast that the Best Buy in Cypress, Texas. Someone posted a picture from the store of a double-pack of bottled water, with a price tag of $42.96. I doubt the price was illegal. (It was about twice the price for a similar pack that Walmart had listed on its website.) And there was probably free tap water in the back of the store. Still, the bad publicity forced Best Buy to apologize.

I wouldn’t want to be that Best Buy manager.

You see, the market, especially in the age of social media, and without silly laws against price gouging, has a way of sorting these things out.

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