Anti-Gouging Laws Prevent Prices from Sending the Right Signals

Governor Chris Christie of New Jersey, a Republican, and New York Attorney General Eric Schneiderman, a Democrat, have warned sellers against “price gouging” in the wake of Hurricane Sandy.

Their words and policies are supposed to help people during a catastrophe, but the opposite is true. As columnist Matthew Yglesias explains in Slate, stopping price hikes during disasters doesn’t make things better for consumers, it worsens shortages and complicates preparedness.

The basic imperative to allocate goods efficiently doesn’t vanish in a storm or other crisis. If anything, it becomes more important. And price controls in an emergency have the same results as they do any other time:  They lead to shortages and overconsumption. Letting merchants raise prices if they think customers will be willing to pay more isn’t a concession to greed. Rather, it creates much-needed incentives for people to think harder about what they really need and appropriately rewards vendors who manage their inventories well.

Consider the case of Thakur Gas. The Branchville, N.J., service station was fined $50,000 for raising the price of gasoline 17 percent when Tropical Storm Irene hit last year.

But which would have been worse for consumers: higher prices at the pump for a few days—or letting gas sit idly in a storage tank while drivers try to figure out alternative means of transportation?

Yet the latter outcome might have prevailed if Thakur Gas had no extra incentive to operate during bad weather. Here’s how Yglesias puts it:

If higher operating margins are what it takes to tempt people to brave difficult driving conditions for the sake of opening the store on a day when customers are likely to be scarce, that’s a small price to pay.

Indeed, many of the problems associated with weather emergencies are precisely caused by the fact that we can’t count on shops to “gouge” their customers…. [S]torm or no storm, the best practice is to try to set prices that balance supply with demand. State governments shouldn’t be trying to stop you.

As economics teacher Joe Fuhrig was fond of saying (and here I am paraphrasing), “Free-market prices have important things to say—if only we would let them talk!”