RYAN BOURNE, CATO INSTITUTE
Dallas County judge Clay Jenkins has issued a local disaster declaration that prohibits “price gouging” on a range of goods in the face of the region’s snowstorm.
The order states:
no person shall sell any of the following goods or services for more than the regular retail price the person charged for the goods or services on February 11, 2021, except for where an increased retail price is the result of increased supplier or other costs (including the loss of supplier supporting funds):
- groceries, beverages, toilet articles, and ice;
- restaurant, cafeteria, and boarding‐house meals;
- medicine, pharmaceutical and medical equipment, and suppliers; and
- hotel rooms, motel rooms, or any other temporary lodging available to the public.
Anti‐price gouging laws like this have perverse economic effects. When crises or natural disasters hit, the supply of important goods can be disrupted and demand for certain goods or services surges as people’s location or daily life changes.
Rising market prices from these effects are a message that demand exceeded supply—i.e. that there were shortages of the good at the old retail price. Embedded within that message of rising market prices are important financial incentives: a rising price provides more of a reason for existing and new suppliers to overcome the difficulties the snowstorm has brought to ensure their stores remain open, production continues, suppliers make sufficient deliveries, or goods in warehouses are brought to market; the rising price, meanwhile, rations goods to those who really value them, preventing over‐purchasing and hoarding.
By suppressing these price signals, policymakers ensure worse shortages of the goods. What’s more, they deter longer‐term investment in “option ready supply.” If certain boarding houses or motels suddenly find massive, unusual demand spikes in winter, they may seek to expand capacity in case future winter crises hit. Others stores may make provisions for a “buffer stock” of products in case of similar weather emergencies next year. Capping prices like this deters these sorts of investments that help enhance an economy’s resilience to future shocks.
True, when natural disasters such as hurricanes hit, a lot of well‐established brands tend to keep prices low in the aftermath anyway, considering that raising them in an emergency might hurt their reputation. Major firms like Walmart can shift resources from unaffected to affected areas swiftly after hurricanes, for example, preserving their reputation for price consistency without meaningful shortages in their stores.
But such reactions are more difficult for smaller, local firms, when the crisis affects a broader region, or when the crisis is a more protracted one—brought on by ongoing inclement weather, or a pandemic, for example. For these businesses and types of crises, the price controls dampen any supply response, worsening overall availability.
Judge Jenkins would argue that his order gives scope for price increases if they are reflective of increases in companies’ costs. But the prospect of regulatory action or lawsuits will be a deterrent for companies considering price increases even when justified by unit cost increases in a world of eagle‐eyed consumers, who tend to notice major price increases during emergencies. Whereas we don’t give Uber surge pricing a second thought, hawkish customers loudly bemoaned face mask price increases at the start of the pandemic, for example.
What’s more, a lot of businesses in emergencies face increased costs that might not reflect the costs of the specific product in question. A store might have had to hire extra workers or pay overtime to clear parking lots or to rearrange premises in light of the power shortages, for example. Some of these increased economic costs may not even show up in the financials. It will take longer for workers to reach stores, for example, and for managers to call around to locate alternative available suppliers. Obtaining higher retail prices first may have been a necessary condition for the business to afford to pay the higher wages that make these efforts, which bring a large opportunity cost of time, worthwhile.
Yes, it is regrettable that emergencies tend to bring rising prices for a range of products. But this reflects the supply and demand realities that emergencies often bring. In the absence of allowing market prices to operate, you still need a mechanism to allocate scarce goods. So with anti‐price gouging laws, those with time on their hands to queue or respond quickly to news of products being available tend to retain access to the goods, while many who would value them more highly and be willing to pay given their needs are left empty‐handed.
For more on the damage of anti‐price gouging laws, you can pre‐order my forthcoming book Economics In One Virus, which has a chapter dedicated to the subject in the context of the pandemic.
Ryan Bourne occupies the R. Evan Scharf Chair for the Public Understanding of Economics at the Cato Institute. He has written on a number of economic issues, including: fiscal policy, inequality, minimum wages and rent control. Before joining Cato, Bourne was Head of Public Policy at the Institute of Economic Affairs and Head of Economic Research at the Centre for Policy Studies (both in the UK). Bourne has extensive broadcast and print media experience, and has appeared on BBC News, CNN and Sky News, whilst having articles published in (among others) the Wall Street Journal Europe, The Times (London) and the UK Daily Telegraph. Bourne holds a BA and an MPhil in economics from the University of Cambridge, United Kingdom.