September 7, 2017

Price-Gouging Laws, Not Hurricanes, Empty Stores' Shelves

Adam Millsap

Senior Affiliated Scholar

Hurricane Irma is moving towards the Florida peninsula and Florida governor Rick Scott has declared a state of emergency. As in Texas, which is dealing with the aftermath of Hurricane Harvey, a state of emergency in Florida includes a price-gouging law to seemingly protect consumers from greedy retailers. While the intention is admirable, the reality is that instead of plentiful supplies at low prices, these laws give us long lines and empty shelves.

Here in Florida, the law puts a price ceiling only on “essential” commodities, which includes food, water, ice, chemicals, petroleum products, and lumber. However, the Florida Attorney General’s website notes that this list is not exhaustive.

Additionally, the actual price limit is not specified in Florida’s law. The law only states that there shouldn’t be a “gross disparity” between the average price of a good during the 30 days prior to an emergency being declared and the price during the emergency. The absence of any specific definition of gouging likely discourages any price increases, even relatively small ones, lest retailers be charged with creating a “gross disparity.”

For example, during Hurricane Harvey a Houston Best Buy store was ridiculed for selling a 24-pack of Dasani water for $43. This equates to $1.79 per bottle, or about what the vending machines on Florida State’s campus charge every day and much less than the $3 or $4 charged at many concerts and professional sporting events. It’s not clear that raising the price by such a modest amount to increase the likelihood water would be there for the people who needed it deserved the label “price gouging” and the scorn that accompanies it.

Florida also activates a price-gouging hotline during emergencies that allows consumers—or “victims” according to the AG’s office—to file a complaint if they suspect price gouging. This hotline is a bit antiquated now, since as Tyler Cowen argues, social media has become a much better avenue for publicly shaming and condemning price gougers. This is disappointing, since raising prices during times of increased demand or decreased supply is often the best way to ensure that the products people want will be available.

The economics of price gouging has been explained many times but it’s worth repeating. High prices incentivize consumers to purchase only what they need to satisfy their highest-valued wants, and leave the rest for others. If water is $1.79 per bottle instead of $0.50, it might not make sense to use it for trivial things, like watering your Bernie Sanders Chia Pet.

Meanwhile, high prices incentivize producers to increase supply. During times of emergency this often means bringing in supplies from less-affected areas, often at a high cost and great personal risk. Some people do donate their time and resources to increase supply where it’s needed, but many others don’t have the financial means to do so. People in the latter group who want to help shouldn’t be demonized for raising prices to recoup their higher costs.

Moreover, while price-gouging laws keep prices down, it’s not clear they reduce costs. A family member who lives in St. Augustine recently drove around for several hours looking for gas since most stations are out. Another acquaintance woke up early to get to a Publix before it opened to be first in line for water. There are other reports of long lines and people visiting several retailers before finding what they need. Even though they don’t show up on the price tag, these search costs and waiting costs are real costs.

Florida’s price-gouging law is well-intentioned, but it does a poor job ensuring that important goods such as water and batteries are available during emergencies. The alternative, allowing prices to fluctuate as needed, might rub some people the wrong way, but using prices to allocate goods to their highest-valued use works better than any other method.