Anti-price gouging laws and economic efficiency: On Rapp and Skarbek on price gouging

Michael Giberson

Geoffrey Rapp, (“Gouging: Terrorist Attacks, Hurricanes, and the Legal and Economic Aspects of Post-Disaster Price Regulation”, Kentucky Law Journal, 2006) expresses concern that fairness-based advocates of anti-price gouging laws and efficiency-minded opponents of such laws have such different approaches to the issue that there is “no way to reach a shared understanding of the worth of such laws.” To help resolve the apparent impasse, Rapp presents two efficiency-based arguments for anti-gouging laws, one based on the possibility of a massive collapse of electronic payment systems and the other seeking to apply arguments from behavioral economics.  I argued against Rapp’s proposed behavioral economics explanation yesterday.

Rapp notes that during a disaster-related failure of electronic payment systems, some consumers will not have ready access to means of payments.  Therefore, after a disaster, products may end up being sold to consumers that just happen to have a lot of hard currency on hand when the payment system failed, rather than being sold to consumers who value the products most.  The resulting distribution of resources would be inefficient. Limits on post-disaster price increases, Rapp argues, help consumers conserve their limited quantities of hard currency and “may give consumers time to make intelligent choices … before those currency reserves run out.”

Rapp’s “massive payment system collapse” explanation seems novel and almost entirely ad hoc. So far as I am aware, no state explicitly links anti-gouging laws to payment systems disruptions. I unaware of any state legislator or attorney general that has justified support for anti-gouging laws based on electronic payment system problems. I haven’t seen any other law, philosophy, or economics paper that even mentions this possibility (except for Skarbek’s reply to Rapp, see below).

While Rapp doesn’t claim that concerns related to payment system collapse motivated these laws, his argument proceeds as if the payment system failure argument should be the foundation for reform of existing laws: if a disaster does not create widespread physical destruction, it is unlikely that payment systems have been compromised, and therefore he concludes anti-gouging laws ought not apply. Similarly, Rapp says anti-gouging laws should only apply in “areas in which there are physical effects, or numerous refugees whose access to the tools of electronic payment methods may have been compromised.”  Anti-gouging laws should apply only for a short duration, Rapp says, since payment system failures are frequently resolved quickly.

This readiness to reform existing laws based solely on a connection to payment system collapses suggests Rapp sees no other rationale for anti-gouging laws. (Indeed, he even fails to acknowledge the behavioral economics argument he raises in the next section of the paper.) This part of the paper seems so focused on the possibility of payment system failure that it seems just tangentially related to the broader phenomena of price gouging, and so of very limited relevance or interest.

If Rapp’s article was more persuasive, then a more careful sorting through his points might be called for. He mentions in passing additional arguments about imperfect information and poor consumer decisions, potential positive and negative externalities associated with post-disaster purchases, and so on. Maybe there is a public policy justification hidden in there somewhere, but not one that is well developed.

In a response to Rapp’s “payment system collapse” argument, David Skarbek (“Market Failure and Natural Disasters: A Reexamination of Anti-Gouging Laws,” Public Contract Law Journal, 2007-2008) tries to score an analytical point based on the elasticity of demand, but fails. Skarbek notes that, under standard microeconomics, no seller prices a good in the inelastic portion of the demand curve. In the elastic portion of a demand curve, where the price normally would be, price increases result in a smaller total expenditure. Therefore, Skarbek argues, it is logically the case that post-disaster price increases will result in smaller total consumer outlays.  Skarbek concludes that anti-gouging laws, because they deter price increases, lead to larger total consumer outlays – not smaller –and therefore do not support Rapp’s aim of conserving scarce hard currency during payment system failure.

Skarbek would be correct as a matter of pure logic if the pre-disaster demand curve remained relevant. It doesn’t.  But assuming an increase in demand due to the disaster, we cannot know as a matter of simple logic whether consumers would be in the inelastic portion of their (new) demand curve at the pre-disaster price. Maybe they will, and maybe not.

The rest of Skarbek’s reply is better. In response to Rapp’s behavioral economics arguments, Skarbek emphasizes the way markets facilitate the discovery and dissemination of information that is useful to efforts to promote recovery. To the extent behavioral biases interfere with efficient market allocation, says Skarbek, competitive pressures can help overcome these biases. Anti-gouging laws, in this reading, interfere with the discovery and dissemination of useful information and do not encourage people to overcome biased ways of thinking.

Skarbek’s reply also addresses some of Rapp’s secondary points concerning externalities and imperfect information and so on.  Skarbek seems on generally sound economic ground in his responses here, too.