The Folly of Gouging Laws

by Benjamin Connor, Age 18
Submitted by: Leslie Orysh

Natural disasters are some of the most devastating, large-scale misfortunes known to man. An earthquake or a hurricane can disrupt the lives of thousands of people more quickly and more irreparably than nearly anything else. The damage, sadly, doesn’t stop after the storm passes. Resources like water, food, and electricity that were plentiful before the disaster become more precious when they are scarce. The only decent course of action for those who sell vital goods after an emergency, it seems, would be to lower their prices as a contribution to the relief effort. What happens, though, when the opposite course is taken?

“Everyone agrees” observes John Stossel in the video Price Gouging, “that if a seller greedily doubles prices after, say, a hurricane, that’s not only bad, it’s immoral.” Thirty-four U.S. states have laws that prohibit the practice of “gouging” (exorbitantly raising) the price of goods after an emergency, and intuitively this seems like common sense legislation to protect disaster survivors from being victimized. Price gouging laws are, however, unwise in the long run; they do more harm than good to those they aim to protect.

Price control laws tend to overlook the central tenet of modern economics: the importance of the interaction between supply and demand. Consumer preference for a product determines how much will be bought at any given price. Suppliers, in the same vein, decide how much of a product they are willing to offer at any given price, based on the profit they think they can make. The subsequent push-and-pull results in a market price that satisfies producers and consumers. When the government sets an upward limit on the price of a product, however, it artificially alters the natural ebb and flow of the free market. This kind of regulation is known as a price ceiling, and gouging laws are some of the most restrictive examples.

In the video Price Gouging, economist Russ Roberts describes the salient dilemma of gouging laws: “Any time there’s a natural disaster, a hurricane, an earthquake, the price of things that people desperately want to have… they go up. Or they disappear.” The typical gouging law would prohibit vendors from increasing their profits by more than 10% in the wake of a natural disaster. Legislators, however, tend to forget the second part of Roberts’ assessment. After a wildfire or an earthquake, commodities disappear. Storefronts are destroyed, generators fail, and there is less to go around. With this new scarcity, demand for goods intensifies. In a free market, price would increase comparably. But if a gouging law prevents the increase, vendors have no incentive to sell. It is crucial that producers continue to offer, say, bottled water after an emergency, but they have no incentive to do so if they aren’t permitted to raise the price. “That price spike may be annoying,” writes journalist Jeff Jacoby “but it’s not nearly as annoying as being unable to find water for sale at any price.”

The problem of price controls tends to compound itself over time. Economist Fiona M. Scott Morton points to 1790s France as an instructive example. In the wake of the French Revolution, the nation underwent a destructive famine (a less obvious type of natural disaster). In response to the emergency, the government set price ceilings on grain during the crisis, and the citizenry-- not certain how long the artificially low prices would last-- bought as much grain as they could, compounding the shortage. This meant that those at the end of the line often didn’t get any grain at all. The same failure to ration occurs in disaster-stricken areas with gouging laws: eager survivors can afford to stock up on scarce goods because of the artificially low price, and this hoarding behavior leaves the slower shoppers behind. Conversely, in a post-disaster situation with no gouging laws, higher prices do their own rationing. As Jacoby writes, “even late-arriving customers are able to buy the water they need-- and almost no one buys more than he truly needs.”

The obvious question becomes, then, why are gouging laws passed? Their existence in thirty-five states is not due to their substance so much as their optics. Politicians can curry favor with their constituents by lowering the price of goods, especially after a disaster. As seen in John Stossel’s Price Gouging, Mississippi Attorney General Jim Hood announced a crackdown on price gouging after Hurricane Katrina. Hood has continued to frame himself as the anti-gouging legislator, and has won four elections in subsequent years. He is currently the only Democrat elected to statewide office in Mississippi, and a popular stance on the issue of price controls may be a contributing factor (Wogan 1). A politician using the bromide “prices should be lower after hurricanes” is much more electable than one who tries to explain the more subtle economic disadvantages to gouging laws.

It is these subtle disadvantages, though, that matter in the long run. Price gouging laws, in attempting to mitigate disasters, actually exacerbate them. They create shortages by denying vendors the incentive to produce; these shortages are then compounded by panicked front-of-the-line survivors who stock up on underpriced goods and leave none for others. While they may seem beneficial at a glance, gouging laws ought to be done away with entirely. In the wake of a disaster, survivors deserve nothing but the most effective relief. In economic terms, nothing is more effective than the free market, which would allow producers the incentive to provide victims with as much bottled water, electricity, and canned goods as they need. Price gouging laws only get in the way of an amazingly powerful free market system, one that we need most desperately after disaster strikes.

Works Cited

Jacoby, Jeff. “What’s Wrong With Price Gouging?” Boston Globe, 4 May 2010.

Morton, Fiona M. Scott. “The Problems of Price Controls.” Regulation, 2001.

Wogan, J.B. "Mississippi AG Jim Hood: The Last Democrat in Dixie." Governing Magazine. Governing, July 2013. Web. 03 Feb. 2018.