September 14, 2008

RALEIGH — Consumers can blame North Carolina’s price-gouging law for the gas lines and shortages appearing in the wake of Hurricane Ike. That’s the assessment of a John Locke Foundation analyst who has studied the unintended consequences of price-gouging legislation.

Click here to view and here to listen to Dr. Roy Cordato discussing this press release.

“Gas station owners are afraid to raise prices in light of threats of prosecution from state government,” said Dr. Roy Cordato, JLF Vice President for Research and Resident Scholar. “Because those owners refuse to raise prices, consumers continue to flock to the pumps, and the stations run the risk of running out of gas.”

The current problem with shortages and gas lines is far different from the situation that followed Hurricane Katrina in 2005, Cordato said. “North Carolina had no problems with shortages or long lines at the gas pumps after Katrina because the price system was able to work,” Cordato said. “The only difference between 2005 and 2008 is the new version of the state’s price-gouging law.”

“It’s against the law charge ‘too much’ for gas — whatever the government decides ‘too much’ means — but it’s not against the law to run out of gas and shut down your pumps,” Cordato added. “Faced with that choice, why would a gas station owner take the risk of running afoul of this arbitrary law?”

Friday morning Gov. Mike Easley declared a state of “abnormal market disruption” in connection with N.C. gasoline supplies. Under North Carolina law, Easley’s declaration charges Attorney General Roy Cooper with enforcing the price-gouging statute. This statute “prohibits the charging of prices that are unreasonably excessive under the circumstances,” according to a news release from the governor’s office.

Cooper’s office responded Friday by urging people to report any evidence of price gouging to the Attorney General’s Consumer Protection Division. A statement from Cooper’s office encouraged gas station owners “to avoid panic price increases” while also urging consumers to avoid “panic fill-ups.”

These steps are counterproductive, Cordato said. “Higher prices play an important role at a time like this: they stem consumer greed,” he said. “If consumers fear prices are about to go up, they’ll all head to the gas station to fill up their tanks. If they have two or three cars, they’ll repeat the process for each vehicle, whether they need the extra gas or not. Higher prices discourage this practice. Higher prices encourage conservation just when it’s needed the most.”

Cordato explored the dangers of price-gouging laws in the December 2006 Nathaniel Macon Research Series report, “North Carolina’s Price-Control Laws: Harming Those They’re Meant to Help.” That report followed the General Assembly’s 2006 decision to expand a three-year-old state price-gouging law.

The earlier law had applied to price changes connected only to natural disasters directly affecting North Carolina. The 2006 revisions extended the price-gouging law to cover any case of “abnormal market disruptions,” as determined by the governor, Cordato said.

“One of the key problems with the law is the vague definitions used to explain price gouging,” he said. “The definitions have nothing to do with sound economic theory and show no consideration of what constitutes efficient price formation or the role of prices in an economy.”

Business owners face a major disincentive if they’re considering raising prices once the law kicks into effect, Cordato said. “Penalties for violating the state’s price-gouging laws can be quite severe,” he said. “Each violation has a maximum penalty of $5,000, and ‘injured parties’ may seek compensation.”

Even the term “price gouging” creates problems, Cordato said. “From the perspective of economic science, the concept of ‘price gouging’ or ‘extreme pricing’ or ‘unreasonable pricing has no meaning,” he said. ” In reality the main purpose of a price-gouging law is to punish sellers who might be pricing according to actual supply-and-demand conditions. If a seller is charging a price that is truly extreme, higher than buyers are willing to pay, he will make either no sales or fewer sales than he would ideally like to make given his inventory.”

In terms of public welfare and social order, it is particularly important to allow the price system to work freely during times of natural disasters and emergencies, Cordato said. “Ultimately, higher prices that arise during emergencies prevent shortages and closed gas stations,” he explained. “The higher prices are not about the exploitational greed of businesses. The high prices are about protecting consumers from the hoarding behavior of their fellow citizens.”

“Higher prices also help to ration what could turn out to be reduced supplies over time,” Cordato added. “Gasoline conserved now will be available to meet customers’ demand if supplies do face any unexpected disruptions. And assuming that prices continue to be allowed to reflect the conditions of supply and demand, shortages will not develop.”

For more information, please contact Dr. Roy Cordato at (919) 828-3876 or [email protected]. To arrange an interview, contact Mitch Kokai at (919) 306-8736 or [email protected].