Price gouging

Price gouging is a pejorative term referring to a situation in which a seller prices goods or commodities much higher than is considered reasonable or fair. This rapid increase in prices occurs after a demand or supply shock: examples include price increases after hurricanes or other natural disasters. In precise, legal usage, it is the name of a crime that applies in some of the United States during civil emergencies. In less precise usage, it can refer either to prices obtained by practices inconsistent with a competitive free market, or to windfall profits. In the Soviet Union, it was simply included under the single definition of speculation.

The term is similar to profiteering but can be distinguished by being short-term and localized, and by a restriction to essentials such as food, clothing, shelter, medicine and equipment needed to preserve life, limb and property. In jurisdictions where there is no such crime, the term may still be used to pressure firms to refrain from such behavior.

The term is not in widespread use in mainstream economic theory, but is sometimes used to refer to practices of a coercive monopoly which raises prices above the market rate that would otherwise prevail in a competitive environment. Alternatively, it may refer to suppliers' benefiting to excess from a short-term change in the demand curve.

As a criminal offense, Florida's law is an example. Price gouging may be charged when a supplier of essential goods or services sharply raises the prices asked in anticipation of or during a civil emergency, or when it cancels or dishonors contracts in order to take advantage of an increase in prices related to such an emergency. The model case is a retailer who increases the price of existing stocks of milk and bread when a hurricane is imminent. It is a defense to show that the price increase mostly reflects increased costs, such as running an emergency generator, or hazard pay for workers.

Laws against price gouging

In the United States, laws against price gouging have been held constitutional at the state level as a valid exercise of the police power to preserve order during an emergency, and may be combined with anti-hoarding measures. Exceptions are prescribed for price increases that can be justified in terms of increased cost of supply, transportation or storage. Statutes generally give wide discretion not to prosecute: in 2004, Florida determined that one-third of complaints were unfounded, and a large fraction of the remainder were handled by consent decrees, rather than prosecution. Proponents of laws against price gouging assert that it can create an unrealistic psychological demand that can drive a non-replenishable item into extinction. As of 2008, thirty-four states in the United States have enacted laws against price-gouging. Price-gouging is often defined in terms of three criteria listed below:

1. Period of Emergency: The majority of laws apply only to price shifts during a time of disaster.
2. Necessary items: Most laws apply exclusively to items which are essential to survival.
3. Price ceilings: Laws limit the maximum price that can be charged for given goods.

A prevalent concern surrounding price gouging is that it exploits consumers. Supporters of anti price gouging laws argue that it is morally wrong for sellers to take advantage of buyer’s vulnerability and increased demand. Opponents argue that buyers are not coerced to take part in this exchange, and they voluntarily agree to pay the seller’s asking price.

Opposition to laws against price gouging

Economists Thomas Sowell and Walter E. Williams, among others, argue against laws that interfere with large price changes. According to this view, high prices can be viewed as information for use in determining the best allocation of scarce resources for which there are multiple uses. Many libertarian economists oppose price gouging legislation and argue that it prevents goods from going to individuals who value them the most. For example, after a storm has felled numerous trees in a locality, a rise in the price of chain saws will discourage their purchase by people with only a minor need for them, making them more available for those with the strongest need. Problems during the Siege of Paris (1870–1871), which critics attribute to price restrictions, are often held up as another example. With price gouging laws in place, producers are only able to charge a set price, then they have little additional incentive to increase supply to adversely impacted area; if producers are able to make extra profit then they will increase supply. These laws lead to after-market operations as consumers with the lowest opportunity costs buy up desired resources and attempt to resell them to public at higher prices.

Another problem is that anti-price gouging laws can discourage businesses from proactively preparing for a disaster. For example, a business could install an expensive emergency power system for power outages. However, if it is prohibited from significantly raising prices, the costs cannot be recovered during the relatively short amount of time when there is no power. As a result, a business that proactively prepared could not compete with others that did not. (This is generally unnecessary for similar businesses in close proximity to one another, anyway.) The end result, at best, is needless shortages and more hardship for the public; at worst, it could be deadly. To correct the situation, price gouging laws, if not abolished entirely, would have to be amended to allow for amortization of equipment that is useful only during a disaster. Unlike amortizing for tax purposes, this would account for how equipment is sporadically paid off internally with the extra revenue, which is not normally done.

A similar situation applies to those who are outside of the disaster zone and willing to go there to sell what is desperately needed. If they are unable to recover their travel costs and be compensated for their inconvenience, then only the altruistic few would bother to do so. Since most anti-price gouging laws are based on the pre-disaster selling price, a person who buys needed supplies at retail in an unaffected area will more easily run afoul of the law than a large wholesaler would. Ironically, it is the "little guy" who could lose more on a percentage basis, in addition to the possibility of hefty fines, rather than "big business."

In terms of fairness, anti-price gouging laws require producers to sell goods below their market-clearing price: the market clearing price is the amount at which quantity supplied is equal to quantity demanded. If goods are priced above their market-clearing price then there will be a surplus of goods, and the converse leads to a shortage of goods. Thus, consumers are unable to buy the necessary goods which they desire in a time of need.

According to the approach of mainstream neoclassical economics, anti-price gouging laws prevent allocative efficiency. Allocative efficiency refers to when prices function properly, markets tend to allocate resources to their most valued uses. In turn those who value the good the most will be willing to pay a higher price than those who do not value the good as much. According to Friedrich Hayek in The Use of Knowledge in Society, prices can act to coordinate the separate actions of different people as they seek to satisfy their desires. Prices fluctuate with changing desires and convey information to buyers and sellers about supply and demand of goods.

Many economists argue that laws against price increases serve only to restrict supplies of a good or service by reducing the incentive suppliers have to undertake any additional costs, hazards or inconvenience that may be required. They argue further saying that these price increases force consumers to ration goods thus increasing the longevity of certain resources in an emergency.

See also

• Extortion
• Just price
• Monopoly
• Price fixing
• Sherman Antitrust Act
• Unintended consequences

External links

• Florida Attorney General FAQ Concerning Price Gouging
• Condemning Price Gouging with Respect to Motor Fuels Following Terrorist Acts of September 11, 2001 in the Congressional Record