Commentary

Magnifying Calamity with Man-Caused Disasters

With $4-a-gallon gas a matter of recent news, a few members of Congress are trying again to give the federal government the job of policing gasoline prices. No matter that in study after study, the Federal Trade Commission (FTC) has found that public concerns over price gouging usually are misplaced. No matter that the FTC has repeatedly told Congress a federal price-gouging law would cause more problems than it solves.

If Congress won’t listen to the FTC, it at least ought to consider how price-gouging policies work in the states: not as intended.

Price-gouging laws usually apply during emergencies. They are meant to help consumers. Unfortunately, the laws interrupt actions by consumers and businesses that would promote recovery.

Higher prices encourage consumers to be especially careful with goods that have become especially useful. Higher prices encourage retailers and wholesalers to go to extraordinary efforts to bring goods consumers need into disaster-struck areas.

A law that keeps prices low discourages these responses and leaves more disaster-recovery work for charities and government agencies.

A Boston-area water main break in May 2010 had officials warning retailers not to price-gouge on bottled water. It was political grandstanding — the state’s price-gouging law only applies to gasoline — but prices stayed low.

Not surprisingly, stores ran out of supplies. Late-arriving consumers were stuck in long lines for water handed out by local governments, or they did without. When tap water was declared safe again, some fast-acting consumers found themselves with a lot of leftover bottled water.

Price-gouging laws also sometimes trip up businesses working with the best of intentions.

In January 1998, an ice storm left millions of people in the United States and Canada without power for days. Chazy Hardware, a small hardware store in upstate New York, sent one of its trucks on a hazardous trip into neighboring Vermont to secure electrical generators for several customers.

The store charged its normal markup to customers who had pre-ordered generators and a higher price for the few extra generators it was able to obtain. It found willing customers for those extra generators, even at the higher price.

That higher price was too high, according to the state government, and it charged the store with price gouging. A court agreed that the store had gone to great efforts to help its customers but concluded that the price charged was high enough to violate the state’s price-gouging law. The store was fined by the state for its efforts on behalf of customers.

After Hurricanes Gustav and Ike struck the Gulf Coast in 2008, damaging oil fields, refineries and pipelines, many gasoline retailers in the Southeastern United States had a hard time finding supplies.

Some gasoline retailers went to extraordinary efforts to resupply. Other retailers, including Frank Shumpert of Pelion, S.C., refused new supplies when those supplies came at higher cost, preferring to be out of stock rather than be charged with price gouging.

The fears may have been justified. Several states launched price-gouging investigations after the storms, and some stores that had raised prices ended up paying thousands of dollars in penalties.

Disasters are great challenges to markets. The usual ways of doing things may no longer work best. Supply lines get disrupted, consumer demands change, and merchants have to find alternatives.

Price-gouging laws add another layer of difficulty to the situation. What extraordinary efforts — if they come with added cost — will be permitted by the state?

Even in states that provide explicit guidelines, businesses sometimes find themselves charged with price gouging. In states with vaguer limits, such as New York’s law prohibiting “unconscionable” price increases, businesses have less guidance.

The only way for a business to avoid being second-guessed by the price police is to keep prices stable, run out of goods when demand spikes and wait for the emergency to pass.

Emergencies are stressful times when emotions run high. It is a behavioral quirk of human nature that consumers will blame merchants who raise prices during emergencies but sympathize with merchants who run out of goods. Price increasers are seen as unwilling to help the community; out-of-stock merchants are seen as sharing community hardships.

But consumers are better off with goods available. Merchants who keep their shelves restocked — even if at a higher price — do more for the community than the merchant unable or unwilling to restock.

Laws against price gouging seek to honor consumers’ emotions, but they make the consumer worse off. Consumers will be better off without the help that some in Congress are offering.

Michael Giberson is a faculty member of the Center for Energy Commerce at Texas Tech University. This essay draws on a longer article appearing in the latest issue of Regulation magazine, published by the Cato Institute.