Price Gouging Laws in the Era of COVID-19-Redux

 

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To all my regular readers I apologize. I know I have already written two blog entries about the subject of price gouging laws.

 

However, I just recently completed a comprehensive essay focusing on the present concerns of price gouging. The topic is still very much relevant considering the strain the COVID-19 pandemic has put on the supply chain as a whole.

 

My latest essay was picked up by the American Freedom Institute. Link to my essay.

Defending Price Gouging

 

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Introduction:

 

Prevailing conventional wisdom dictates that price gouging is immoral. During times of crisis to even contemplating raising prices is considered to be morally dissent.  Especially in times of need, such as a pandemic of highly communicable disease. The act of price gouge tends to be a natural corollary of the most basic economic principles.  Enacting price gouging laws is an attempt to circumvent resolute economic laws. Typically, in the name of “fairness”. Viewing it from the perceptive of pricing equality ignores the inner mechanics of market pricing. To interrupt this process generally leads to less than optimal results. In every regard, price gouging laws are merely price controls with a different name.

 

Various varieties of price controls have their ill effects well documented. One prime example being rent control measures.  Which historically have shown to contribute to housing shortages and deteriorating conditions of impacted housing units (Bennett & DiLorenzo, 1985 P.69-71) [1]. Typically, most people just look at the immediate impact of the policy. Which is it “stabilizes” housing prices. However, the downstream effects of housing shortages and landlords losing any incentive to regularly maintain their properties are not acknowledged. Price gouging laws yield similar effects.

 

Price gouging does perform necessary functions within the market. Operate as an informal safeguard against supply shortages of essential commodities. Most people are concerned with the here and now. The emotional vitriol of feeling ripped-off or the vendor having leverage supersedes economic reasoning. Per the research of economist  Michael Munger, back in 1996 during Hurricane Fran, crowds appalled the arrest of several North Carolina price gouging vendors. These enterprising young men were selling ice at $8.00 per bag.  Despite the jubilation of the crowd over their arrest, the potential patron still lined up intent on purchase $8.00 bags of ice (Munger, 2007) [2]. Clearly demonstrating a disconnect between consumer perception and consumer behavior. If this price was truly inordinate no one would be lining up to buy ice.

 

For the rest of this essay will be dedicated to defending the actions of these aspiring entrepreneurs. As well as all other vendors who engage in the practice of price gouging. Price gouging has several critical functions in managing the market supply of essential goods. It discourages hoarding.  It provides differential compensation to vendors and employees in times of crisis. Finally, it encourages the production of essential goods.

 

Price Gouging Discourages Hoarding:

Has anyone attempted to purchase toilet paper lately? Anyone who has walked down the paper products aisle (toilet paper, paper towels) has noticed an extreme scarcity of commonly available products. Making me question whether or not COVID-19 is truly a respiratory virus or another incarnation of cholera. My poor attempt at humor aside. It is evident that people are conspicuously stockpiling toilet paper. Toilet paper is a shelf-stable product that is relatively low in cost, making an ideal item for hoarding.

The means by which price gouging operates as a deterrent from an item being hoarded is simple. If the price is higher people will be less apt to purchase excessive amounts of the good [3]. This function becomes more imperative as inventory for essential items starts to dwindle [4]. This premise is clearly compatible with the Law of Supply and Demand. If there a large spike in the demand for a specific item the market price will reflect this accordingly. If there is a law in place holding retailers to maintain the pre-crisis price of toilet paper shortages are inevitable. Naturally lower prices will encourage more consumption regardless of the scarcity of the item. Causing decreased availably and even shortages  ( Lee, 2015, P.13) [5]. Higher prices are the natural consequence of an influx in demand. The higher prices serve as a means of regulating supply.

While advocates of keeping prices fair have good intentions, they are typically ill-informed. Price gouging is not a perfect mechanism, it does disadvantage the poor. The question becomes is it better to have expensive toilet paper or no toilet paper. Most people would agree that expensive toilet paper is preferred. Some would suggest keeping the prices on par with pre-pandemic pricing and just impose purchasing limits. A vendor implemented purchasing limit is not full-proof. Is minimum wage enough of an incentive to encourage employees to enforce such company enacted policies? I would surmise not. Government sanctioned price controls would create supply shortages. This presents a similar situation to the rent control example presented previously.

 

Compensating Differential to the Vendors:

 

All because we are in the midst of a national emergency doesn’t mean that incentives fall by the wayside. If anything incentives become more important, especially if vendors are facing substantial risks by providing goods and services. To quote Adam Smith:

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. (Smith, 1776, P.25) [6].

 

The message behind this excerpt from The Wealth of Nations is quite clear. No one sells goods or services for the sake of charity. Most vendors are attempting to make a profit. Prices fluctuate with market demand. However, in instances where there is bodily harm for providing the same goods and services, it is reasonable to expect to pay more. As previously mentioned this isn’t charity. The consumer is simply transferring the risk to the vendor. By expecting them to endure the risks inherent in a natural disaster or outbreak of deadly disease. Through braving such dangers I believe a compensating differential is justifiable. Which essential is additional compensation for offsetting undesirable aspects of a specific job, such as bodily harm [7]. Vendors also take on other risks as well. In the instance of a natural disaster, there are additional logistical considerations. Such as damaged infrastructure and lack of utilities (electricity, running water, etc). Beyond that vendors also take on legal risks. Potential fines for violating shelter-in-place orders (Giberson, 2011, P.6) [8].

 

The additional profits for enduring risk are what will incentivize entrepreneurs to continue to provide goods and services. It is a fact that is rarely brought up in a debate concerning the morality of price gouging. Even if you find the decision of business owners to raise prices to be distasteful, consider their employees. Business owners are going to have to pay their employees more to weather such dangerous conditions. If you still believe that price gouging is spurred by greed, remember that most business owners have employees. The hourly employees enduring such conditions need adequate compensation.

 

Price Gouging Encouraging Production:

 

Higher prices not only encourage entrepreneurs to endure more risks but also stimulates production. The incentives of increased profits persuade actors throughout the supply chain. If the price of hand sanitizer goes up exponentially this may persuade companies to divert production. Such as distillery switching from producing liquor to hand sanitizer [9]. If demand for hand sanitizer outpaces that of vodka it would be shrewd to reallocate resources in the direction of market demand. These adjustments in production are swayed by the potential for higher margins.

 

Market prices are the explicit quantification of information. They operate as a signal to the consumer as well as the producer. As was mentioned previously high prices convey short supply to the consumer. Hence why price gouging guards against hoarding. In a Hayekian sense, we are contending with imperfect market information (Zwolinski, 2008, P.16) [10]. If we do not have direct knowledge of the supply of toilet paper or hand sanitizer, what is going to entice us to produce it? The high prices direct production towards essential goods. Craft distilleries are now transitioning to producing hand sanitizer due to the high prices [11]. The high prices are a direct result of the high demand. The high prices convey the toll that overall demand has taken on the supply (Zwolinski, 2008, P.17) [12]. Pricing operating as a signaling mechanism operates as an indicator of how resources are to be best allocated. Government intervening on moral grounds can only cause more issues. The asymmetry in market information makes it impossible for a top-down solution to make pricing more equitable.

 

Conclusion:

 

Despite the conventional view of price gouging, it does play a vital role in managing the supply of essential goods in times of emergency. It stifles hoarding. It provides just compensation to vendors for assuming the risk and other logistical hardships in crisis conditions. It operates as a signaling model for resource allocation.  Spirited repudiations of the practice are well-intentioned but misguided. No one likes to feel ripped off. No one likes to see people who are disadvantaged suffer. However, there are justifiable reasons for the sharp increase in prices.

The jubilation of the crowd after the gentlemen selling ice (back in 1996) were arrested is understandable. Much like the advocating for fair pricing, this reaction is based upon faulty assumptions. Typically is indicative of anti-market bias.  Which is defined as “a tendency to underestimate the economic benefits of the market mechanism” [13]. Anti-market bias explains the amount of class envy and undue contempt aimed at the wealthy. This is also the narrative that fuels a lot of the irrational and debunkable claims about labor unions. Certain regulations and even specific forms of taxation. It is easy to be outraged by higher prices. It takes more effort to attempt to understand why prices are so steep.

 

 

 

 

 

 

 

Arizona Doesn’t Have Any Price Gouging Laws?!

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Amid the COVID-19 pandemic, many have witnessed an economic phenomenon that is synonymous with times crisis. That is the practice known as price gouging. This practice has the proclivity to ignite a universal cascade of outrage and indignation. Superficially such a reaction seems understandable. Considering by definition it is a sharp increase in the price of a good that is in high demand [1]. On the surface, it would seem morally base to take advantage of an emergency situation such as a hurricane. The general consensus would extend to the outbreak of an emergent pathogen such as COVID-19.

 

There is a general consensus on pricing gouging is morally objectionable. However, there isn’t much agreement on what constitutes price gouging. Approximately two-thirds of all states have some sort of price gouging law on the books [2]. It appears as if most states have a different interpretation of what price gouging entails. For instance, the state of Alabama provides clear and concise guidelines for defining price gouging :

Ala. Code §§ 8-31-1 thru 8-31-6

Prohibits “unconscionable prices” for sale or rental of any commodities or rental facilities during a declared state of emergency. A price is prima facie “unconscionable” if it exceeds 25% of the average price during the last 30 days immediately prior to the declared emergency and that increase is not attributable to reasonable costs. [3]

 

In contrast, the state of Texas provides a vague description of what is considered price gouging. Per Texas state law: “exorbitant or excessive” prices in connection with sale or lease of necessities during a declared disaster” would be illegal [4]. What defines “exorbitant” prices? I would not suggest that there should be federal standardization of price gouging laws. That should be left up to the states. At the very least be clear about the parameters defining the criminal act. Too much ambiguity can make enforcement problematic.

I currently reside in the state of Arizona. Arizona does not presently have any price gouging laws enacted. It is speculated that the reason being is that natural disasters are a rare occurrence [5]. Being a mountainous and landlocked state we are insulated from tornadoes and hurricanes. We have the good fortune of not experiencing the seismic activity that afflicts California. The prospect of a natural emergence putting a strain on the supply of essential goods is relatively foreign to Arizona. The one exception being the event of the 2003  Kinder Morgan pipeline burst. Which resulted in fuel shortages [6]. The significant increase in fuel prices passed along to the consumer was viewed as exorbitant [7]. Many residents at the time viewed it as vendors supplying fuel were engaging in some form of price gouging.

Seventeen years later some are now calling for corrective action to price gouging in Arizona[8]. Many vendors have been reacting to the COVID-19 outbreak with higher retail prices on essential goods. These higher prices are due to an increase in demand and the stockpiling of commodities such as toilet paper.

Personally, I am very incredulous when it comes to price gouging laws from an economic standpoint. Being a proponent of states rights’, Arizona can in my view pass price gouging laws. As states should cater their laws to what best suits their economy and culture providing it does not violate the Constitutional. Due to such measures not being pertinent in Arizona prior to COVID-19 is why such laws did not previously exist. I do know of at least one person who has referred to Arizona as “backward” for not having such laws in place. This is a misguided opinion.

As I mentioned earlier Arizona is relatively isolated from circumstances that would make price gouging more prevalent. This isn’t like hurricane-prone Florida or South Carolina not having price gouging laws in place. There is also the implied assumption that more laws and regulations are a net good for society. States and municipalities with fewer laws are unevolved. A law that is  either pointless, ineffective, or unjust is not universally positive due to the fact is merely another constraint.

 

I grew up in New England where there are still a litany of archaic laws and ordinances still on the books. What is colloquially known as “blue laws”. Laws that are no longer culturally or economically relevant. Frequently prohibit actions that most likely victimless crimes. While some history buffs find these laws quaint and harmless, I disagree. Even if these laws are never enforced, philosophically I oppose them. What is the purpose of laws? Depending on your answer to that question, it will shape your perception of what laws are just and reasonable. I feel that most blue laws only reinforce my rejection of legal positivism. The law should not determine what right, but it should protect what’s right. This perspective is codified in our Bill of Rights. Nowhere did I see any guarantee of economic equity or immunity from making bad decisions. The Bill of Rights were  established on the grounds of natural rights. Suppose to government decree and guarantee of positive rights.

 

In my next blog post, I will discuss why price gouging laws are economically illiterate. If lawmakers here in Arizona are persuaded by public outrage, I can only hope that they are reasonable. Provide firm guidelines that define what constitutes price gouging. That they opt for justifiable limitations. Unlike, Connecticut which cites any increase in prices during a  time of an emergency as illegal [9].