John Locke Update / Research Brief

Practical Compassion Lets Prices Rise During a Crisis

posted on in Economic Growth & Development, Fiscal Insight, Law & Regulation
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Why we oppose the state’s anti-“gouging” law enforcing pre-disaster pricing

Laws that forbid price increases during extreme events have bad unintended consequences at the very worst of times. Precisely because of those consequences, economists and pundits at the John Locke Foundation have warned against those laws for decades.

It’s a difficult topic also because of heightened emotions of such events. “Price gouging” seems to be greedy, even cruel, unless you take into account that prices in a free market provide information on the relative changes in demand and supply.

What is really cruel is to ensure people can’t get necessities. At that point, it won’t matter if a shortage came about despite a sincere, heartfelt intent to help people. Lacking access to necessities will feel just as cruel to affected storm victims.

Leading up to and immediately following a disaster like Hurricane Florence, people’s demand for necessities goes way up, and supplies are constrained. To reflect this, their prices must increase.

If government outlaws “price gouging” when that’s happening, necessities will run out right when they’re needed the most. Worse, there won’t be enough incentive to bring more supplies in.

People won’t like the higher prices, but outside suppliers will. If you care about your fellow North Carolinians, the proper perspective to have is it’s better they have access to higher-priced necessities than to have no way of getting necessities at all, for the “regular” price.

The neediest can still get what they need; the rest of us will conserve

John Hood recounted experiences after Hurricane Fran in 1996 to readers of Reason. Here was how he felt about finally being able to buy gasoline from a retailer who had borrowed a generator to run his pumps, gasoline that was more expensive but available:

I didn’t feel gouged. Excited would be more like it. Not only did I have transportation, but also a potential source of air conditioning — a necessity of life even in late summer.

Hood also discussed the problems faced by carpenters, tree-removal firms, generator retailers, and others whose services were sharply in more demand. Then as now, politicians warned of “gouging,” and people were treating them as already guilty just for trying to do their job:

“[Attorney General Mike Easley] gave customers the impression that every tree service is in town to rip people off,” said the owner of one Charlotte-based firm that sent a crew to Raleigh. Her fellow tree-service owners called the attorney general’s office to ask him what a “legal” price for tree removal was, and got no answer, making it impossible to defend their charges to angry customers. …

“I wish I had never seen a generator,” said one retailer from nearly Lillington, tired of arguing with customers. “This is the worst thing that has ever happened to me in this business.”

Another retailer from Raleigh said that he sold his generators below retail and still got customer complaints. “We went out of our way to help people, and I’m not sure it was worth it.”

The lesson to remember, Hood wrote, is this:

You can’t repeal the basic incentive structure of economics with a government proclamation. Control prices after a hurricane, as North Carolina’s state government did by fiat and some local governments did by ordinance, and you are making a conscious decision to force some people to wait longer for help. Let prices rise to the market level, and the supply of ice, water, food, gas, generators, and labor will expand as well.

Dr. Karen Palasek wrote in Carolina Journal in 2005 about how “price gouging, a term that has no economic meaning, is actually helpful in averting a gas crisis” — because it helps prevent hoarding and frivolous consumption and therefore ensures gasoline is still available to the neediest.

Writing in the aftermath of Hurricane Katrina, Palasek warned that anti-“gouging” laws would

very likely bring us to the point of more empty gas pumps, long gasoline lines, gas rationing, or some nightmare combination of the three. Keeping the pump price lower than it would otherwise be through these policies will also encourage non-essential driving, and discourage conservation.

Palasek pointed out the temporary changes in supply and demand that were changing gasoline prices, which an anti-“gouging” law would not account for, to the detriment of people who need gasoline the most:

Katrina destroyed refining capacity, and that will reduce supplies of domestically refined gasoline, and push up the market-clearing level of price, at least temporarily.

At a high enough price, gas will always be available to those who need it most. But when gasoline is sold below its replacement cost, stations ‘run out,’ and gas is available only to the lucky. This might be fine for a lottery, not for a market.

Regulations that prohibit gasoline prices from reaching a market-clearing level will ensure that gas remains unduly scarce.

The issue, as Palasek explained, isn’t an “ethical” price; it’s helping people be able to access a temporarily scarcer necessity:

Prices aren’t ethical or unethical. If exchanges are voluntary, all pricing is fair.

The way to reduce the quantity of gasoline demanded in the near term is to allow price to rise to whatever the market will bear. This is not price gouging, it’s responsible reservation of a scarce good—like the reservation pricing we see in collectibles and other markets.

Only those with really urgent demands will pay the highest prices, as should be the case. The rest of us will conserve, and adjust for the future as the situation unfolds.

That’s a key point. You’re not forced to buy when exchanges are voluntary. If you think the price is too high, and you’re not faced with an urgent need, you won’t pay. As consumers make that mental calculus, they are rationing their consumption on their own without a rationing law forbidding them from buying.

And without even thinking about it, they are preserving gasoline for people with the greatest need for it.

North Carolinians grumbled about high gas prices after Katrina, and policymakers responded with a strong anti-“gouging” law in 2006. But in 2005, unlike Georgia and many other anti-“gouging” states after Katrina, North Carolina didn’t see gasoline shortages or long lines.

Dr. Roy Cordato discussed the negative unintended consequences of anti-“price gouging” laws in his November 2006 Macon Series report on North Carolina’s Price-Control Laws: Harming Those They’re Meant to Help:

The Special Role of Price Increases During Emergencies and Natural Disasters

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 such as hurricanes or severe weather. During these times, upward pressure is put on prices from both the supply and the demand sides of the market. Prices should be allowed to rise as quickly as possible to reflect these market conditions.

Consider the case of gasoline before and after a hurricane. What is typical in such conditions is that consumers, in anticipation of the hurricane, tend to hoard gasoline by purchasing much more than they will need for any reasonable length of time following the hurricane. A family with three cars may run out and fill all three cars’ tanks and may also fill extra containers in anticipation of shortages in the hurricane’s aftermath. If prices are allowed to rise as the demand increases, this “hoarding” behavior will become increasingly more expensive and therefore discouraged.

Cordato also explained what those higher prices do to encourage more supply after the storm:

A free price system would also encourage the appropriate behavior on the supply side. While higher prices discourage hoarding on the part of consumers by increasing profits, they also encourage the generation of more supply by producers and sellers. …

Higher prices and the increased profits they bring about create incentives for people inside and outside the affected area to try to find ways to fill the supply gaps as soon as possible.

Absent this, Cordato warned about the unintended negative effects of North Carolina’s new law:

Price-gouging laws like the one implemented in North Carolina short-circuit the market process and its beneficial effects. First, by keeping prices lower than their market-clearing levels, they encourage overbuying by consumers. This occurs at a time when conservation is needed the most. By encouraging overbuying, they induce shortages of critical items, such as ice, gasoline, batteries, and basic food supplies.

It should also be noted that price-gouging laws do not help low-income families. Instead they benefit those people who can get to the stores or gas stations first, before the shortages occur. This, in fact, is not likely to be lower-income, working-class families with both husband and wife having to work.

In 2008 Hurricane Ike impacted gasoline supplies. Things predictably changed for the worse in North Carolina. The anti-“gouging” law was tested, and it “worked” — so North Carolinians found themselves facing gasoline shortages and long lines.

The posted price for the gasoline no one could get, however, was “fair and ethical.”

Cordato explained in a press release that our shortages and long lines owed to the unintended consequences of the anti-“price gouging” law, not the hurricane:

“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?”

“Esse Quam Videri”: Shouldn’t we in North Carolina mean it?

Bearing in mind North Carolina’s wonderful state motto, I have written on the being vs. seeming dichotomy of anti-“gouging” laws. I feel compelled to ask, as I did in 2017, who benefits?

Consider a situation in which North Carolina is hit hard by a hurricane, and North Carolinians need lumber, water, gasoline, generators, etc. North Carolina’s price-gouging law would prevent outside suppliers from changing their normal plans of supplying other areas with those goods.

They wouldn’t be able to afford to make such expensive changes to their distribution (what Giberson called “extraordinary supply efforts”). Not if they could only charge the same price they’’d charge if nothing had ever happened. Something major did happen.

Who benefits from all those supply plans not changed? North Carolinians on the plus side of first-come, first-served, and after that, consumers in other states. They don’t have to compete with stricken North Carolinians for those supplies; they don’t have to try to outbid them.

So the effect of North Carolina’s price-gouging law is to ensure, when disaster strikes here, that we run out of necessary goods while people in other states don’t even have to worry about competing with us for what we need.

What kind of law is that?

There’s probably no better illustration of the being vs. seeming of anti-“price gouging” than the one found by Prof. Michael Munger in Raleigh after Hurricane Fran in 1996, where the same people who were waiting in line for high-priced bags of ice actually clapped when the people who were selling the ice were arrested, leaving them with no ice.

Shutdowns at the Colonial Pipeline, which supplies 70 percent of North Carolina’s gasoline, triggered the anti-“gouging” law in the fall of 2016, as did Hurricane Matthew. Then–attorney general and gubernatorial candidate Roy Cooper made a seeming-based comment about it — “A supply crunch shouldn’t be an excuse to rip off people who need gas” — which I found so misleading I had to take it apart phrase by phrase.

At one point I warned that hoarding behavior was becoming rational, especially as prices at the pump post-disaster were actually a penny cheaper than they were the week before — and lines and shortages were beginning.

That year, however, also saw the governor relax regulatory costs on bringing in more supplies. Even as Cooper was warning would-be “gougers” (and thereby encouraging shortages and discouraging bringing in more supplies), Pat McCrory signed an executive order that waived

certain size and weight restrictions and penalties … and certain regulations and penalties … for the vehicles transporting gasoline and other petroleum products to areas within North Carolina.

As I noted later, this seemed to offset some of the problems with the anti-“gouging” law. It was a good sign in 2017 that Gov. Cooper followed McCrory’s lead by temporarily cutting these regulatory costs as Hurricane Harvey threatened disruptions. He did the same earlier this month as Hurricane Florence approached. Nevertheless, we still saw shelves being emptied with pre-disaster hoarding.

I also wrote a column for Carolina Journal about the anti-“gouging” law seeming a solution while being a problem. I wrote this after Attorney General Josh Stein talked to WRAL reporter Gerald Owen warning about retailers who “take advantage of people’s desperation” by charging prices that are “out of whack from what they should be,” with Owen implying it is “the worst of people” and talking of folks being “scammed.”

At one point I explained:

Those empty shelves are because of our anti–”price gouging” law.

Prices are signals, and when that signal is too low for conditions on the ground, people will buy too much. When that happens, we run out.

A state law that forbids pricing based on conditions on the ground — and backs that up with threats of fines and being taken to court! — makes it harder to bring in fresh supplies after that same state law helps us run out of existing supplies.

But what about people being “taken advantage of”?

The thing is, when the government dictates prices to prevent consumers from being “taken advantage of” by higher prices during a natural disaster, it’s telling suppliers they’re going to be taken advantage of. Laws against “price gouging” are laws that tell suppliers they can’t break even.

In practice, they’re signal flares telling suppliers, Stay away from there!

Cordato was quoted in a September 12 news item in the News & Observer on “How to report price gouging if you see expensive gas, supplies during a hurricane.” The article’s lede contrasts “Good Samaritans [who] undertake selfless acts to help their neighbors and complete strangers” with “Others [who] take advantage of people’s desperation with high prices” before giving the state snitch line for the latter.

The seeming approach doesn’t conceive that there could be more than two types of people after a disaster, let alone that high prices actually help our neighbors. But the article correctly points out that “while price gouging laws are politically popular, some economists and politicians oppose them as bad policy that actually makes shortages worse during emergencies.”

Cordato’s quote explains how the higher price actually helps our neighbors be able to get necessities. As he put it,

the higher price encourages conservation right at the time when it is most needed. This will leave more gasoline in the tanks at the gas stations where it is available for those who really need it both before the hurricane and during its immediate aftermath, instead of in the tanks of cars that are sitting in people’s garages or driveways.

Government price controls are notorious for negative unintended consequences. But during a crisis, those consequences threaten to be worse.

We at JLF have consistently argued against anti-“gouging” laws, and not because of the good results they’re intended to have, but because of their actual bad results in times of greatest need. Necessities being available at higher prices is better than necessities seeming affordable when you can’t get them.

Jon Sanders is an economist studying state regulations, that spreading kudzu of invasive government and unintended consequences. As director of regulatory studies and research editor at the John Locke Foundation, Jon gets in the weeds of all kinds of policy… ...

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