Carpe Diem

Price gouging following Hurricane Sandy: New Jersey vs. DC

1. Back in 2008, economist Art Carden wrote “As surely as summer follows spring, natural disasters are followed by saber rattling about ‘price gouging,’ which is usually defined very lucidly and clearly as an ‘unconscionable’ increase in the price of a necessity. These tend to follow a formula, so I thought that instead of writing a new article discussing the unintended consequences of every price-gouging law that goes into effect after a natural disaster, it would be useful to write a universal, fill-in-the-blank article discussing the economics of price-gouging laws.”

That universal fill-in-the blank form appears below for the most recent disaster, Hurricane Sandy, using information from this news report about New Jersey

Fearing increases in the prices of basic items as a result of (disaster: HURRICANE SANDY), officials in (state or municipality: NEW JERSEY) have declared a state of emergency whereby restrictions on “price gouging” are now in effect. According to (politician or law enforcement official: GOVERNOR CHRIS CHRISTIE), the law is designed to protect innocent consumers from “unconscionable” increases in the prices of food, gasoline, ice, electric generators, and home-repair services.

Here’s an excerpt from the news article:

Gov. Chris Christie issued a forceful reminder to merchants: Price gouging during a state of emergency is illegal; will be investigated by the Attorney General and Division of Consumer Affairs; and will result in significant penalties.

“During emergencies, New Jerseyans should look out for each other — not seek to take advantage of each other,” the governor said. “The State Division of Consumer Affairs will look closely at any and all complaints about alleged price gouging. Anyone found to have violated the law will face significant penalties.”

2. The city of Washington, D.C. took a much different approach when Washington Mayor Vincent Gray legally sanctioned “price gouging” on Monday by authorizing an emergency surcharge of $15 for taxi cab rides originating in the District of Columbia (in addition to the normal fare).

3. Following Hurricane Charley in 2004 and complaints about price gouging from politicians and newscasters, Florida journalist David Brown wrote an article “Price Gouging Saves Lives in a Hurricane,” where he commented that “One item in very short supply among the finger-wagging newscasters and public officials [about "price gouging"] here in central Florida is an understanding of elementary economics. Maybe FEMA can fly in a few crates of Henry Hazlitt’s Economics in One Lesson and drop them on the newscasters and public officials.”

MP: Kudos to the District of Columbia and Mayor Gray for apparently having some understanding of basic economics and actually sanctioning “price gouging” for taxis following Hurricane Sandy.  Basic economics tells us that higher prices following a natural disaster help to allocate scarce resources more efficiently than legally preventing prices from rising to a market-clearing level. If you want to guarantee that there will be critical shortages of essential goods following a natural disaster, the most effective way to achieve that outcome is to have laws that artificially prevent prices from rising to reflect the true, underlying market conditions.

By making higher, but accurate, market-based prices illegal in New Jersey following Hurricane Sandy, Governor Christie’s “command and control” Soviet-style approach to prices will delay the recovery and guarantee shortages of the goods most needed. Can FEMA fly some crates of “Economics of One Lesson” to New Jersey and make sure the governor gets a copy?

29 thoughts on “Price gouging following Hurricane Sandy: New Jersey vs. DC

  1. This is simply a subset of the Iron Rule of Politics:

    Since at any moment in time, the vast majority of the populace has no grasp of economics, it is preferable to promise them that you can change the laws of economics in their favor.

    Thus was born the War on Poverty, Medicare, Solar Energy and the notion that everyone should be a homeowner.

    An entire nation (the USSR) learned to queue up for days to buy “affordable toilet paper”.

    • I think it’s even worse. Even people who understand the basic law of supply and demand will still attempt to use political power to gain favourable circumstances for themselves.

      So long as they think they can benefit, they don’t give two shakes of a rat’s tail about the foundational principles of economics.

      • So very true.

        The Government role is to keep the market being competitive (e.g. giving special incentives to draw MORE nearby suppliers to enter the market, introducing “disruptive technologies”, etc), to thwart the gouging practices of monopolies (e.g. limiting the MTA fare raise), and to prevent collusion among the players by listening to consumers’ complaints.

  2. Those of you who support “price gouging” legislation, explain something to me:

    How is allowing for a plentiful supply of goods to be available in a disaster zone immoral but forcing people to wait in long lines for a scarce supply of goods moral?

      • That’s completely false. Higher prices do not necessarily translate into higher profits and can actually be associated with losses. If the wholesale cost of a good rises faster than the retail price is able to, losses can result. That’s why gas stations sometimes shut down and stop selling gas when prices get too high.

      • So, punishing “greedy businessmen” is more important than appropriate allocation of goods to customers? I hope you are being sarcastic.

        If “greedy businessmen” are making lots of money supplying goods to those in a disaster area, then other “greedy businessmen” will be encouraged to also do so. And all such “greedy businessmen” will have the resources (profit margin) to order additional supplies at a premium to get fast shipping. All of which brings additional resources to bear.

      • “Every voluntary transactions is an accurate snapshot of the price at that moment.”

        Live in the U.S.? Markets boom and bust = market’s are not efficient.

        • Two things:

          1.) Markets fail and yet markets are far more efficient than any alternative.

          2.) Changing prices are often cited as an example of markets’ failures to accurately predict. Market prices adjust to accommodate changing reality, of which expectations are a part. The only way to keep prices from changing is to keep the world at stasis. Lemme know when that happens.

        • Sorry, but every transaction IS an accurate snapshot of the price at that moment. Boom and bust is an ex post observation. The fact that at a later date I realize I should or shouldn’t have completed a transaction doesn’t mean it wasn’t an accurate reflection of the price at that time. Was $35 an accurate price for AAPL eight years ago? Of course it was. And $600 is an accurate price today.

  3. There is some tortured logic in this post.
    - So Christie says “Price gouging during a state of emergency is illegal”. I haven’t read the particular law but it does seem to me that there is at least _some_ market economy still in play. So if, say the gas station bought the gas at $3.95 and sold it at $4.10 that’d be OK. If they bought it at $3.95 but they sold it at $6.95 that’s not OK. And yes, in essence that’s price gouging. Yes, it might still be OK for some libertarians out there but that doesn’t make it morally palatable (at least to me).
    - The world must have turned upside-down if we are using the DC council and Mayor Gray in particular as examples of “economic freedom”. So basically, the closely controlled taxicab commission who doesn’t let anyone compete freely, decides to award themselves $15/trip since it’s and emergency and that’s called an example of market economy? Really?!?!?! That’s called the power of government monopoly – nothing more, nothing less. It is mind-boggling to see this post at AEI of all places!

    • My point about DC was a little bit “tongue in cheek.” Sure the DC taxi system has some anti-market, anti-competitive features, although compared to places like NYC it’s much more market-based.

      But allowing, or sanctioning higher taxi prices following Sandy, shows some economic logic at work in DC, and some recognition that prices should be higher after a disaster for essential goods and services.

      While certainly not perfect, allowing taxi prices to rise in DC by $15 is much more sensible economically than announcing that price gougers in New Jersey will be prosecuted, fined and jailed.

    • In regards to your first point, DreamLiner, the morality of price gouging is an intriguing issue.

      If prices were to rise to the $7 mark in your question, I know there are those who would object. But no one is forcing you to buy from that gas station. You could always go somewhere else (even in a disaster zone).

      But let’s, for the sake of argument, say this guy is the only one with gas for miles around. He is faced with a daunting task: if he sells his gasoline cheaply, he will run out very quickly. Those who need the gas will not necessarily get what they need. People will be in long lines hoping to get some. He has no clue when his next delivery will be coming. How, then, can he allocate his fuel best? He could try a lottery system, but that has the same problem as above. Why not just raise the price? By doing this, he discourages stockpiling by consumers, and those who need the fuel the most can buy it. Consumers will have to pay more, but they can get the resources they need. Otherwise, it’s just a crap shoot. Therefore, isn’t it the gas station’s moral duty to charge the price that will allocate his fuel most efficiently? Isn’t it his duty to make sure the fuel gets to where it is needed?

      • jon, for the sake of argument, what about the lack of market information? No power or transportation being available. How can the suppliers have market information and then gain access to the market without power and delivery capabilities?

        • That’s part of the problem, Citizen. They don’t know when their next shipment is coming in because they have no way of communicating.

        • Citizen, there is really no such thing as no market information.

          If nobody is stopping at his station, the market is telling him the price is too high (even if he’s the only one for miles – perhaps everyone has decided that it’s worth waiting for the price to come down). If there’s a long line of cars queuing up to fuel up, that means the price is too low. Uncertainty about the ability to replenish supplies is itself market information.

    • So if, say the gas station bought the gas at $3.95 and sold it at $4.10 that’d be OK. If they bought it at $3.95 but they sold it at $6.95 that’s not OK.

      That just underscores the stupidity of the price gouging law. If nobody is willing to buy gas at $6.95/gallon, none will be sold at that price and the price will have to be lowered to attract buyers. Price balances supply and demand.

      Besides that it seems that a reminder that markets are forward looking. The past wholesale price is meaningless. What’s important is the forward wholesale price and whether a disaster will simply prevent supply for a period of time. Retail prices will adjust to reflect all realities and goods priced above that which the market will bear simply won’t be sold, to the detriment of the supplier. Thus, there is no such thing as “gouging”

    • What about the message that higher prices for these essential services give to potential suppliers. If these items are is short supply then allowing the price to go higher will send a signal for other companies to ship in emergency supplies and help lessen the scarcity. If prices do not rise, then these companies may decide the extra cost/risk of trying to operate in a disaster area are not worth it and fewer supplies will be shipped in.

      Seems to me that all these price gouging laws are doing is making these essential supplies scarce by limiting the response from potential suppliers. The only likely beneficiaries will be the black marketers of these items.

    • Dreamliner,

      If gasoline is scarce, then the only “morally acceptable” method for ensuring gasoline is available to those who need it is by raising prices. In Louisana and Texas, we’ve seen the disastrous effect of so-called “price-gouging” laws every time we’re threatened by hurricanes. Here’s what happens:

      1. The first evacuees from Houston fill up their gas tanks at the closest stations, fill up second cars at those stations, and even fill up spare cans. There’s little penalty to the first evacuees for buying as much gasoline as they can at the closest stations prior to departing.

      2. Later evacuees discover that gasoline stations have used up their supplies and closed.

      3. Gasoline jobbers from Dallas and other inland cities have no incentive to send extra supplies to Houston. Price-restricted retail stations in Houston cannot pay the jobbers enough to offset the transport cost to obtain more supplies.

      On the other hand, if gasoline prices were allowed to float to equilibrium levels, both early and late evacuees are more likely to obtain the gasoline they require:

      1. early evacuees would buy only enough of the high-priced Houston gasoline they required to evacuate, expecting to buy more at lower prices as they moved inland.

      2. many second cars would be left at home in garages, due to the very high cost to fill two vehicles with the higher priced gasoline;

      3. Houston retail stations could pay more to gasoline jobbers from Dallas and Austin, ensuring that additional gasoline supplies would be moved to the evacuation area.

      As I see it, restricting the supply of gasoline to a potential disaster area – by restricting the price which retail stations can charge – is certainly not morally palatable.

  4. The great economist and mayor of New York, Michael Bloomberg, has loosened the hack license regs to permit cabbies to haul more than one fare at a time – and to permit limos to stop to pick up passengers on the streets during the Sandy crisis.

    Funny thing is that he did not specify how many times the cabbie can charge for the metered ride. I spent six months commuting to work in NYC from Cleveland on assignment and found that cabbies always take advantage of bad weather. I flew to Newark and bused into 42nd Street station where the cabbies waited for fares. When it rained, they loaded multiple passengers in their cabs and proceeded to charge every passenger for the meter reading at each Hotel drop-off.

    I will never forget the time that I read the meter, divided by the number of passengers and handed the cabbie a buck which included a tip. I thought the guy would hit me until I pointed out that the mounted cop across the street probably could help us resolve the issue. He threw the dollar at me and I gave it to the hotel bellboy.

  5. Being a resident of FL since the 1940′s, I can tell you that before “gouging laws,” repairs after a hurricane were accomplished fairly quickly. Anybody in AL, GA, SC,Tenn, etc that had a truck (even a pickup) and time on their hands would buy plywood, shingles, lumber (even ice) etc and haul it to FL and sell it at “market” price. The more supplies the lower the price. Today, after the 2004 hurricanes and the gouging laws, it takes years (yes, years) to get adequate supplies for all repairs. Supply assistance via risk takers from other states is not allowed, or at least not worth their effort. Why would anyone, including a big box retailer, pay premium shipping to get supplies through jammed regular channels when they can gain no advantage by charging more. To me this is another example of government spreading around the misery.

  6. You anticipate the storm and stock up on necessities. Then you want to make a profit out of it. Where is the problem. If the storm fades before hitting the shore you’re in loss. Furthermore, everybody had the same info and could have stocked up (maybe not gasoline if you live in an apartment).

  7. Note: This response includes several examples, which are meant to illustrate a general principle. These examples are not meant to be interpreted as literal points for any current events, and should not be used for that purpose.

    By making “price gouging” legal, it helps ensure that essential goods and services are available to more people.

    If a retailer is not allowed to raise prices on (pick an item here), the earliest customers will be most able to buy all the product from the retailers’ shelves, thus resulting in shortages of the product. By allowing the price to rise, the early customers will not be so inclined to buy up everything that’s available; they’ll only buy what they really need. (Does anyone really need 1000 bags of ice, when power is expected to be restored in two days?) Instead, the first customer will buy less, leaving more available to other customers. If a hotel has three rooms available, and a family (husband, wife, 2 kids, grandparent) comes in needing space for the night, should the hotelier be forced to keep his rates low so the family can split up into all three available rooms? Or would the general welfare be better served if the price for the rooms doubled, forcing this family to stay in one room so the hotelier can rent one of the rooms to the family following them into the hotel lobby?

    I cast my vote for allowing so-called price gouging.

  8. Here is another viewpoint supporting price gouging: In regard to some emergency items, the seller may have been storing them for just such a disaster and incurred storage fees. I’m in that position, so I know about this problem. Anyone storing emergency supplies should compute his storage cost into the sale price of the items, including the space allocated in your home. In that case, double the usual market price is not at all outlandish.

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