Predictable Consequences of Anti-price Gouging Laws

Michael Giberson

West Virginia Governor Joe Manchin released a statement last Thursday indicating his disappointment with Marathon Oil’s decision to temporarily halt sales to independent gasoline retailers in a part of the state affected by flooding and a May 9 declaration of emergency. The May 9 emergency declaration triggered the state’s price gouging law, and Marathon told Convenience Store Petroleum Daily News that it would lose money on sales made under the capped prices. (Marathon continues to supply independents with whom they have supply contracts, they are only suspending sales to customers lacking such contracts.)

The governor’s statement notes that the state’s “anti-price-gouging laws allow businesses to increase prices to recoup costs if the increase is directly attributable to additional costs imposed on the business.” I wonder if the phase “directly attributable to additional costs imposed on the business” has been well clarified in the courts. Several states seemed to have ramped up prosecution of price gouging – for instance, this report on Georgia notes that fines have ranged up to $20,000 plus restitution for price gouging during supply disruptions last September. Since wholesale gasoline costs have increased over the three weeks since the declaration of emergency, clearly Marathon’s costs have gone up. But how much of the cost increase is “directly attributable to additional costs imposed on the business”?  In such an environment, Marathon may have reasonably decided not to risk a lawsuit by pursuing the opportunity to “recoup costs” under the law.

Two comments. First, no surprise that a price control would limit supply. Economists often go on about unintended consequences, but this kind of effect is so predictable as to not fall into that category.

Second, this practical case serves to illustrate a philosophical position advanced by Matt Zwolinski in his articles on the ethics of price gouging, namely, his “non-worseness” claim. Zwolinski has argued that if you grant that a seller could ethically refuse to sell a product during an emergency, say by closing shop rather than remaining open, and that buyers are no worse off if a seller instead decides to stay open but raises prices, then it cannot be unethical for the seller to stay open but raise prices.

In the instant case, while Marathon continues to make sales under pre-existing contracts, they have decided to suspend sales to other potential customers in order to avoid triggering a legal complaint. Those potential customers – retail gasoline stations in the affected area – now have to search out new sources of supply due to the operation of the states anti-price gouging laws. Can we agree that every one is behaving legally, and the law is making people worse off?

NOTE: Zwolinski’s articles are cited and related comments are available in my prior posts on price gouging.