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Posts Tagged ‘Price Gouging’

Exactly one month ago, I wrote “A Primer on Price Gouging” to explain why government-mandated price controls are an unwise response when prices for certain goods climb after a disaster.

Here’s a video from Johan Norberg on the topic.

And here’s Professor Michael Munger from Duke University on the same issue.

Those are both excellent presentations.

In a column for the Nashville Business Journal, Professor Daniel Smith explains in written form why laws against price gouging inevitably backfire.

High prices in the wake of a disaster or in the face of uncertainty often spark consumer outrage and calls for stricter price-gouging laws. Such measures, however, would actually harm consumers searching for necessities in emergencies. …in the face of uncertainty, such as the coronavirus, it is instinctive for consumers to stock up on goods, such as water, toilet paper, and nonperishable food. Stores need some way to discourage consumers from hoarding or wasting necessities as well as to encourage the increased manufacture and delivery of necessities to the affected area. Higher prices, driven by the increase in demand for these goods, naturally incentivize both of these important functions. …higher price encourages consumers outside of the affected area to also economize on their purchases. The increased demand for building materials for rebuilding New Orleans after Hurricane Katrina drove building material prices up across the nation, leading unaffected consumers to delay less essential building or remodeling projects. …Higher prices also encourage the manufacture and delivery of necessities to the affected area. …higher market prices, by increasing the supply of necessary goods, is the driving force that will ultimately push the price back down. …there is always concern for providing for low-income residents. But the empty shelves created by price gouging laws do little to help them.

It’s worth pointing out, incidentally, that workers can engage in “price gouging” as well.

This tweet from Mark Perry cites a story about nurses being able to earn much more money if they agree to work in New York City.

For what it’s worth, I fully support those nurses extracting much higher pay. They’re going into the medical equivalent of a war zone.

And that’s a good outcome for society. Allowing prices (whether for goods or labor) to rise and fall in response to market conditions ensures that resources go where they have the most value.

Sadly, many politicians in Washington either don’t know or don’t care about the harmful impact of intervention.

Indeed, the House of Representatives wants to demonize so-called price gougers, as reported by Billy Billion of Reason.

When it comes to the federal government’s coronavirus response, there is much room for self-criticism. But that won’t come from the House’s new select oversight committee, announced by Speaker Nancy Pelosi (D–Calif.)… House Majority Whip Jim Clyburn (D–S.C.), telling CNN’s Jake Tapper that the committee will instead focus on things like “price gouging” and “profiteering.” …In other words, if Clyburn’s description is to be taken at face value, lawmakers will scapegoat private businesses, as opposed to delving into the list of ways the government has failed the American public. …The South Carolina representative said the House will…punish those that set high prices on essential goods, though he didn’t say how this would work in practice.

What’s really galling about the actions of Pelosi, Clyburn, and other politicians is that they’re insulated from the policies they impose on the rest of us.

They have voted themselves generous pensions, so they they don’t have to worry about a bankrupt Social Security system.

They have voted themselves lavish fringe benefits, so they don’t have to worry about dealing with the Obamacare disaster.

And they doubtlessly have arranged to be first in line for goods and services if there are shortages caused by anti-gouging laws.

Maybe, just maybe, they’re part of the problem rather than part of the solution.

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After Hitler’s National Socialists were defeated in World War II, the allies imposed price controls on the German economy for the ostensible purposes of fighting inflation and preventing “price gouging.”

That policy led to massive shortages, black markets, and hoarding. Fortunately, as described in this video, a very clever economist abolished those controls, thus setting the stage for Germany’s post-war economic miracle.

The lesson to be learned is that politicians should let markets determine prices. Price controls of any kind, as indicated by the cartoon, will cause people to withhold goods, services, and/or labor from the marketplace.

Unfortunately, many people overlook that lesson when there’s some sort of disaster.

In a column for Bloomberg, Scott Duke Kominers asserts that sellers should not be allowed to increase prices when there’s a sudden increase in demand.

One might think that steep prices for disinfectant in the middle of an epidemic are just markets at work — a way of getting scarce goods to the people who value them the most. I’m sure that’s what price gougers tell themselves. …But that’s not the right way to think about disinfectant at this particular moment. …if you can pay $87 for a bottle of Purell instead of the usual $2 that probably doesn’t mean you’re more concerned about the risk of infection than your neighbor; it just means that you have more disposable income. Thus buying low-priced disinfectant and selling it at steep markups effectively transfers disinfectant supplies from lower-income people to wealthier ones. …in situations such as this it may be best for society to force prices below market-clearing levels in order to make sure everyone has access; that’s exactly what laws prohibiting price gouging attempt to do. …There’s a serious consequence to keeping the price low, of course: we end up with rationing, since there’s not enough to go around. But that hits everyone — rich or poor — more or less equally.

Politicians obviously like this argument. Most states have laws against “price gouging.”

That may be smart politics, but it’s bad economics.

J.D. Tuccille of Reason explains why such laws are misguided.

…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.” …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… 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…manufacturers and distributors that they should increase production, and where they should send the goods—if they’re allowed to. …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. …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.

Art Carden, an economics professor at Samford University, shows why anti-gouging laws backfire on consumers.

You’ve seen the pictures on your social media feeds: Empty shelves across America. Panic-buying. Hoarding. …this is exactly what the supply-and-demand model we teach in introductory economics courses predicts when we actively prevent the free market from functioning. The shelves are…empty because…governments aren’t letting prices change to reflect new market conditions. …“price gougers”…get tarred as villains while it’s actually the politicians who are making the problem worse by interfering with prices. …the fact remains that we get a lot more hand sanitizer, toilet paper, and other supplies when we make room for people who are just in it for the money. You may not like their motivations, but they’re doing something your state’s governor and attorney general aren’t doing. Namely, they’re getting valuable emergency supplies into your hands.

Veronique de Rugy of the Mercatus Center warns about adverse consequences in her syndicated column.

It’s normal for people to stock up on supplies during crises. The immediate results are empty store shelves, soon followed by higher prices. When this happens, politicians around the globe demand an end to the price hikes. …such heavy-handed intervention is a mistake… If prices are kept artificially low, there’s little incentive for shoppers not to buy as much as they can. …The fact is there’s no better means of slowing the rising demand — and, especially, reducing excessive hoarding — than allowing the very price hikes that governments are trying to prevent. But price hikes have another important advantage: They create the necessary incentives for entrepreneurs to shift resources toward activities that increase the supply of these goods. The higher prices encourage higher levels of production for goods like masks and hand sanitizers, which then increases supply. …When governments prevent price hikes, they unwittingly create shortages of vital supplies. …Aren’t we better off when products are actually on the shelves and available for purchase, even if only at higher prices? When no such products are to be found, except by the politically and socially connected, ordinary citizens lose out.

John Hirschauer’s piece in National Review cites some academic research on this topic.

The unintended consequences of price controls have been confirmed…in empirical literature. Take, for instance, the study published by three scholars in the Journal of Competition Law and Economics who examined the merits of proposed price-control laws in the wake of Hurricanes Katrina and Rita. …The researchers reviewed the historical data on gasoline price hikes and found that “price increases were due to the normal operation of supply and demand and not price manipulation.” Upon reviewing the body of gasoline price-control studies, the group found that “neither consumers nor the economy benefit [from price controls], because the apparent monetary savings to consumers are transformed into costs of waiting or other forms of nonmarket rationing that exceed the monetary savings.” Through econometric analysis, they estimated that the “economic damages would have been increased by $1.5–2.9 billion during the two-month period of price increases” if the federal government had instituted price controls.

The only thing I’ll add to this discussion is that people are sympathetic to anti-gouging laws because of a belief in social equality. We think that everyone – rich and poor – should be treated equally during a disaster.

And in some cases, such as a group of people stranded on a lifeboat, that’s the right approach. Nobody would argue that scarce supplies (limited emergency provisions of fresh water and food) belong to the person with the biggest bank account .

But the economy isn’t a lifeboat. As explained in the above excerpts, it’s possible to get more provisions with the right incentives. Higher prices will encourage entrepreneurs to produce more scarce supplies (in this case, everything from toilet paper and hand sanitizer to respirators and ventilators).

So what’s the bottom line? Price gouging is no fun if you need to buy supplies in an emergency. But a free market is better than the alternative of government controls that lead to shortages, black markets, and hoarding.

I’ll close with this cartoon, which Art Carden included at the end of his AIER column.

And I’ll also add this joke that Mark Perry shared on twitter.

P.S. This video explains why the price system is so important and these three videos explain why anti-gouging laws backfire because they hinder the price system.

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I generally use Texas as a good example when discussing public policy. Particularly compared to places such as California.

I like the sensible attitude about guns, but the absence of an income tax is particularly admirable when considering economic issues, and I confess to being greatly amused when I read about jobs and investment escaping high-tax states like California and moving to the Lone Star State.

But being more pro-market than California is a low bar to clear. And I’ve written that government is too big in Texas.

And now, because of Hurricane Harvey, I have another reason to criticize the state.

Texas has a law against “price gouging,” which means politicians there (just like the politicians in places like Venezuela) think they should get to determine what’s a fair price rather than allow (gasp!) a free market.

The state’s Republican Attorney General is even highlighting his state’s support for this perverse example of price controls.

>Price gouging by Texas merchants in the path of Hurricane Harvey has drawn the attention of Texas Attorney General Ken Paxton, who said Saturday that his office is looking into such cases. …”We’ll be dealing with those people as we find them,” he said. …Paxton issued a warning about price gouging Friday as the hurricane approached the Texas coast. Texas law prohibits businesses from charging exorbitant prices for gasoline, food, water, clothing and lodging during declared disasters.

Paxton is right about Texas law, but he is threatening to enforce a terrible policy.

To help explain why Texas law is bad and why the Attorney General is misguided, here’s a video from John Stossel on so-called price gouging.

It’s disgusting that Mississippi arrested John. The guy should have received a medal for putting his money at risk to serve others.

To augment Stossel’s analysis, here’s a video from Learn Liberty that explains why politicians shouldn’t interfere with the price system.

And here’s Walter Williams discussing the role of “windfall profits” and how high returns encourage the reallocation of resources in ways that benefit consumers.

The bottom line on this issue is that buyers understandably want low prices, particularly in emergency situations.

But that makes no economic sense. However, since buyers generally outnumber sellers, politicians will always have an incentive to demagogue on the issue.

I’m not surprised when we get economic illiteracy from certain politicians. Nonetheless, it’s very disappointing when Texas lawmakers sink to that level. I hope Mr. Paxton at least is feeling guilty.

P.S. But I’ll close on an upbeat note by sharing my collection of Texas-themed humor: Here, here, here, and here.

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