Do anti-price gouging laws help the victims of natural disaster?

Michael Giberson

At the LegalMatch Law Blog, Sonya Ziaja editorializes in favor of laws against price gouging:

Natural forces are blind to what they destroy. People aren’t. In the past month, tornadoes and flooding in the South and Midwest left behind crippled lives, destroyed homes, and eviscerated infrastructure.

Now as the victims of the tornadoes try to rebuild, they are left vulnerable to another foe—people who use the disaster for economic gain by price-gouging.

Thankfully, there are legal protections against price-gouging in many states…. [The] price-gouging statutes allows the attorney’s general to investigate and prosecute instances of price-gouging once a state of emergency is declared.

After some discussion of the difficulty of defining price gouging precisely and the resulting differences in state laws, Ziaja asks a very good question: “How does any of this help the victims of natural disaster?”

Her answer sticks to the simple intended effect of the laws: “In theory, the threat of these consequences will deter potential price-gougers from profiting excessively from the misfortune of others.”

That line is a fine beginning to an answer, but unfortunately, is this case, it is also the end of the answer. The editorial moves on to other issues. What should come next is any evidence on whether the deterrence theory actually keeps people from profiting excessively, however that is defined. After all, first we should assess whether the law actual does the main thing it attempts to do. Following that one should look at whether the law has any unintended consequences, positive or negative, for victims of natural disasters.

On the issue of unintended consequences it seems clear that price gouging laws has negative effects for victims. The laws discourage efforts by merchants to bring useful goods into disaster-affected areas. Stores have been fined by the state after going to extraordinary efforts to bring electric generators into areas where an ice storm left millions of people without power. Gasoline retailers sometimes refuse to resupply at higher wholesale prices during declared emergencies, afraid they’ll be accused of price gouging. Victims of disasters are worse off if the laws reduce the resources available to them for recovery.

I’ll provide a few more details and analysis in a subsequent post on the consequences of price gouging laws. (The interested reader should also check out my price gouging article in Regulation magazine.)

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5 thoughts on “Do anti-price gouging laws help the victims of natural disaster?

  1. The application of “anti-price gouging” laws to a situation in which a gasoline retailer pays a higher price for new supply and charges a correspondingly higher price at the pump is ludicrous. It is almost always the result of political grandstanding. However, for an independent retailer, the potential cost of legal defense against a state Attorney General is daunting. The decision to avoid the potential problem, while it might be an unintended consequence, is surely a fully anticipatable consequence.

  2. Absolutely, Ed. Retailers are usually able to pass along wholesale price increases, according to state laws, though the details vary. And even if a retailer is only passing along wholesale price increases, if the retail price jumps a lot the store may generate a lot of consumer complaints and possibly a state investigation. However, if a store has cost increases that are not as easy to document as a regional increase in wholesale prices (paying workers overtime, engaging in extra expense to find supplies, etc.), it can be risky to pass those kind of cost increases in higher prices.

    Personally, I think it is none of the state’s business what a retailer charges, so long as the consumer is aware of the price and agrees to pay it. That is to say, I’m willing to jettison price gouging laws on libertarian principles alone. But since the world is not yet willing to give up on a lot of government regulations on libertarian grounds, I’m willing to work out the economic and other social consequences of price gouging laws and try to demonstrate the net harmful results.

  3. I can conceive of no situation in which the potential incremental revenue resulting from a “price gouge” would be sufficient to offset the expense and risk of a state lawsuit. Therefore, I can conceive of no situation in which a rational retailer or contractor in a state with a “price gouging” law would put forth any additional effort to provide extraordinary services following any emergency. There is no potential upside; and, there is lots of downside risk, including destruction of the providers reputation in the market.

  4. Ed, I think some merchants irrationally hold to a customer-service oriented attitude and still go to extraordinary lengths to meet customer demands, even if the costs are higher during emergencies and prices have to go up. Don’t worry, the state will come along after a while and drive such irrational merchants from the market.

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