Friday, September 02, 2005

Price Gouging

Florida-Price Gouging FAQs

It is unlawful during a state of emergency to sell, lease, offer to sell, or offer for lease commodities, dwelling units, or self-storage facilities for an amount that grossly exceed the average price for the commodity the thirty days before the declaration of the state of emergency or the seller price for the commodity the thirty days before the declaration of the state of emergency unless the seller can show increases in its prices or market trends justifying the price. Examples of necessary commodities are food, ice, gas, oil and lumber.

Free marketers often argue that price-gouging laws are counter-productive, the rise in prices during a crisis reflects the current outcome of supply and demand. With high prices, goods and services will be distributed to those who need them most (who will pay the most) and the high prices will encourage people to either bring goods and services to the area affected, or will encourage people to prepare for future crises, knowing they will be compensated by the high prices during the crisis period.

I have a few problems with this analysis.

First, in times of crisis, supply and demand do not necessarily efficiently distribute goods. If there is not a large enough supply for everyone's basic needs, the goods will then simply be distributed to those with the most money while most people would believe that if there is not enough food for a group of people the food should be divided in a way so that no one goes without any food.

Second, it is unlikely that emergency supplies would reach people in a crisis zone faster if price gouging were allowed. If emergency agencies designed to respond in emergencies cannot adequately serve the area, it is unlikely private companies or individuals would substantially improve the situation.

Third, there are very few local retailers who will stock more supplies on the chance they will be able to raise prices dramatically during a crisis. Even if it were legal to raise prices, they would face social pressure not to raise prices and face a negative reaction from customers after the crisis because people not brainwashed by years of studying economics often feel prices should be tied to the cost of the item, or after years of experience have an expectation that a commodity has a “fair” price, irrespective of supply and demand.

Fourth, in ordinary situations maximization of personal profit is expected and works for the public good, such as Adam Smith's butcher. However, people are not simply selfish economic profit maximizers, we are social beings that have compassion for one another. A moron like John Stossel thinks the only way the seller of a commodity can distribute goods to those who need them most is by charging high prices. This is simply not true. Human beings -- but perhaps not libertarian androids like Stossel -- can evaluate who needs an item more by seeing their condition and listening to what they say is there need. Human beings give to those in need, even when they have lost their wallet in a flood.

Fifth, legal price gouging may actually encourage inefficient hoarding. If John Stossel was living and New Orleans and heard about the Hurricane, he might go to the store and try to buy up all of the supplies he could, precluding others from preparing properly, knowing he would simply be performing his duty as a libertarian-American to charge as much as possible for the supplies need.

The law I would support
I would differentiate between high prices on goods or services that give an unexpected windfall to the seller, and high prices charged by a seller who brings goods or services to the needy during a crisis based on a profit motive.

For example, a store that suddenly raises prices on water right before or after a hurricane hits, but does not bring in any more supply or have its costs raised by the crisis would be guilty of price gouging. A person who purchases and loads up his truck with water and ply-wood that would not otherwise make it to the affected crisis area and drives to the affected area for the possibility of resale for profit would not be guilty of price gouging, but rather would be supplying a needed service.

I recall a hypo in law school: A person drives off-road and death valley and their car breaks down. Two days later and about to die, another off-road driver comes upon the unfortunate person about to die. The second driver offers to give the first driver water and a ride in exchange for $20,000. The first driver is upset at the callousness of the second driver, but must agree. Should the contract be enforced?

I answer that the contract should not be enforced, unless the second driver roams around death valley only so that she could offer help at a steep price. If the second driver was not searching for abandoned drivers, allowing a high price to be saved is a random reward for being an asshole and the high price does not encourage helping broken down drivers. If the second driver was searching, not enforcing the contract would result in more deaths.

Current price-gouging laws could simply allow for a defense that the person would not have sold the good or service absent the high price. Even a store owner could argue they made extraordinary efforts either to store supplies in the case of emergency or ship them in for the emergency.


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