Laws Against 'Gouging' Are Simplistic and Wrong
So-called price gouging helps send important signals to buyers and sellers.
Washed up among the wreckage of Hurricane Harvey is an old debate: Price Gouging—Heinous Crime or Useful Tool?
When a natural disaster like Harvey monkeywrenches the normal operations of daily life, basic necessities suddenly become scarce, and merchants often start charging much more for them. In Texas, The Washington Post reported last week, "One station sold gas for a whopping $20 a gallon. A hotel reportedly charged guests more than twice the normal rate. One business sold bottles of water for a staggering $99 per case—more than 10 times some of the prices seen online."
On first impression this seems downright evil: greedy businesses taking advantage of desperate people to line their own pockets. There oughtta be a law against it!
There is. Texas has a law against price gouging. So does Virginia. So do many other states. But as economists point out time and again, jacking up prices in an emergency actually serves socially useful purposes.
For starters, it prevents hoarding. A husband and father who doesn't know how long his town will be without gasoline or drinking water might be inclined to buy as much as he can haul away. If several people do that, supplies run out quickly.
That's exactly what happened nine years ago during Hurricane Ike. "Area and state consumers were in what can only be described as panic buying Friday as gasoline prices spiked," according to press accounts from Tennessee. WSLS in Roanoke, Va., reported that gasoline stations ran dry because the hurricane had "put people into a frenzy."
On the other hand, a consumer who would buy 10 cases of water at $10 per case is likely to buy much less at $100 a case—thereby leaving more for others. This is the market's extremely efficient way of rationing scarce goods.
Even those sharply critical of price gouging concede the correctness of such observations. The Los Angeles Times' Michael Hiltzik, for instance, acknowledges that the "textbook economics" of price-gouging are "irreproachable." But he and others still find it objectionable.
They find it objectionable, first, because they consider price spikes morally wrong. Behind the objection lies an unspoken assumption: that there must be some morally correct price for a consumer good, independent of the wishes of the person selling it. Yet a merchant has no moral obligation to sell his goods in the first place. A grocer who closes his store so he can evacuate the city is not breaking any cosmic moral laws, for instance. And if a merchant has no moral duty to sell something at all, then it makes little sense to say he has a duty to sell it at a certain price.
Price-gouging critics also find the practice objectionable because they think it won't really work.
Economists point out that high prices are signals not just to consumers ("buy less"), but also to providers ("supply more"). The latter signal efficiently helps with re-supply efforts. But some people don't believe that. "The notion that the free market can somehow redress the extreme disruption of supply and demand that occurs during a disaster," Hiltzik claims, "is exactly wrong." Only government can do that, he says.
This will come as news to people who have been receiving help from the Red Cross and countless other volunteer organizations that ship supplies into stricken areas after every disaster. (They are part of the free market, too: They simply price their goods at zero.)
It also will come as a surprise to anyone who has been living in Richmond for a while. In 2003, Hurricane Isabel struck the region—toppling thousands of trees, knocking out power across vast sections of the state, destroying homes, and killing more than 30 people. It was the most expensive disaster in the state's history.
And look what happened. Generators "have come and gone unpredictably at local stores," the Times-Dispatch reported on September 27, but "they have remained in stock all week in the classified ads. And they're still selling." Jessika Simmons said she still had four left—because she bought 18 in North Carolina to sell in Richmond.
Another Times-Dispatch story reported on Jack and Kim Sheperson, who "drove more than 10 hours from Marion County, Ky., to make a little money. They were selling chain saws for $300 and generators for $650 to $1,000."
That same story quoted Bill Bellamy, who "said he stopped at a Home Depot yesterday morning to find a man from Buffalo, N.Y., who was selling generators from his truck."
" 'He wanted $1,245 for a 4,000-watt generator. It's a rip-off, ' (Bellamy) said. 'That type of generator would sell for about $549. I passed,' the Henrico County resident said. 'But now I wish I paid.' "
For every complex problem, H.L. Mencken once said, there is an answer that is clear, simple, and wrong. He wasn't referring to laws against price gouging—but he sure could have been.
This column originally appeared at the Richmond Times-Dispatch.