Price-Gouging Laws Will Do More Harm Than Good During the Coronavirus Pandemic
High prices for sought-after goods cause temporary pain, but not as much as government efforts to "help" frustrated consumers.
In response to surging prices for items that Americans are snapping up to deal with the COVID-19 pandemic, politicians themselves are peddling policies that will prove expensive for the people they're ostensibly supposed to help.
For instance, New York State Sen. Brad Hoylman (D-Manhattan) wants to punish "price gouging," Texas Attorney General Ken Paxton has asked state residents to rat-out vendors who charge what their goods are worth, and Arizona Attorney General Mark Brnovich is fretting over his powerlessness to prosecute suppliers who respond to market demand. It's all framed in cuddly language about protecting the public, but that's exactly who such government intrusions hurt.
The first problem is that, for as common as accusations of "price gouging" are, the term has no fixed meaning. Asked when rising prices cross the line to become criminal, New York Attorney General Letitia James told NPR, "there's no definitive answer to that question, but you know it when you see it."
Vagueness is the order of the day for many states. Some—including Alabama, Florida, and Maine—forbid selling at an "unconscionable" price. Idaho and Texas ban sales at an "exorbitant or excessive price." And New York splits the difference with restrictions on "unconscionably excessive price" increases during an emergency, according to FindLaw. New York's Sen. Hoylman would "establish that an 'unconscionable excessive price' is a price greater than 10% higher than before a public health emergency began" (because that's as good a number as any, I guess, and the definition already used in neighboring New Jersey).
As you might imagine, there are problems inherent in pulling numbers and words out of the ether to mandate a legally permissible price for goods that are flying off the shelves because of rising demand, restricted supply, or both.
"Among economists, price gouging … simply reflects the emotional response non-economists have to rapid price increases," write Antony Davies, associate professor of economics at Duquesne University and James Harrigan, managing director of the Center for the Philosophy of Freedom at the University of Arizona, in a recent column. "What politicians and other anti-price gouging proponents would have you believe is that we can have what we want, at the price we want, simply by passing a law."
Laws can't change the market conditions that drive prices up. Prices for hand sanitizer, face masks, and easily stored food are rising right now not because sellers are mean, but because demand is rising relative to the immediately available supply.
Those rising prices tell consumers that what they want is now more valuable than before and should probably be used more sparingly or be replaced by something else, if possible. It also tells manufacturers and distributors that they should increase production, and where they should send the goods—if they're allowed to.
"The higher the price of hand sanitizer rises, the more incentive entrepreneurs have to divert shipments from where they are needed less to where they are needed more," Davies and Harrigan add. "The higher the price of surgical masks, the more incentive manufacturers have to work around the clock to make more, and to feed them into the supply lines."
Sure enough, GOJO industries is "operating around the clock" to produce hand sanitizer, 3M has "ramped up production" of respirators, and many other companies are responding to the messages they're getting from the market. Allowed time, goods will get to where they're needed, and prices will drop as supply meets demand.
But if Hoylman's bill passes, prices for hand sanitizer won't be allowed to rise more than 10 percent in New York even as they match the market rate in Arizona, which has no price controls. That sends a strong signal to distributors to ship the available supply to the Grand Canyon State rather than the Empire State. It also distorts incentives to manufacturers that could make more hand sanitizer or newly enter the market to meet surging demand.
Well, anti-gouging price caps don't entirely block market signals; black markets inevitably arise to meet demand. But illegal deals hidden from public view aren't as effective as open markets at signaling to manufacturers and distributors.
"A fact always missed by proponents of price caps is that black-market prices are higher than the unregulated market prices would be," commented Donald J. Boudreaux, professor of economics at George Mason University, in 2005. "The reason is that unregulated market prices—being visible and legal—will stimulate a larger inflow of supplies than will black-market prices."
In some cases, anti-price gouging efforts actively separate buyers from sellers lest somebody agree to pay an "unconscionable" price.
"Companies, pressured by growing criticism from regulators and customers, cracked down" on so-called price gouging by vendors selling much-sought products to customers preparing for the pandemic, The New York Times reported last week. "The attorney general's offices in California, Washington and New York are all investigating price gouging related to the coronavirus."
As a result of the pressure, Amazon restricted sales of popular items by third-party vendors, while eBay banned them outright. That left many buyers unable to purchase what they wanted at any price, no matter that sellers have stockpiles of the items waiting to be shipped.
Using the law to drive apart willing buyers and eager sellers is not just counter-productive, it's immoral. It threatens people with fines and imprisonment if they make mutually agreeable deals that politicians don't like.
"Price gouging is not inherently coercive, and if it is exploitative at all it is so in a way which makes it difficult to see why it is wrong (or, at least, more wrong than the actions of those who do nothing to help victims of emergencies)," wrote Matt Zwolinski, professor of philosophy at the University of San Diego in a 2008 paper for Business Ethics Quarterly. "Moreover, price gouging can serve morally admirable goals by promoting an efficient allocation of scarce and needed resources, and by creating economic signals which will lead to increases in the supply of needed goods available to desperate populations."
Which is to say, unless Brad Hoylman, Ken Paxton, and Mark Brnovich are laboring in their basements to crank out face masks to satisfy rising demand, they have no standing for the insults they fling at vendors who actually provide the things to the public. Posturing about what sought-after goods and services should cost in some world of the imagination does nothing in the midst of a crisis to increase their availability.
As economists repeatedly note, rising prices are unpleasant and unpopular, but they aren't the problem; the real problem is that demand is rising faster than supply. Rising prices cause temporary pain while telling suppliers that more is needed. Price-gouging laws, by contrast, falsely tell the public that politicians are watching out for them even as they extend shortages and the resulting pain.
Crises like the COVID-19 pandemic come and go, but "price-gouging" laws demonstrate that intrusive politicians are a recurring plague.