Michael Giberson of Texas Tech’s Center for Energy Commerce wrote on “The Problem with Price Gouging Laws” for Regulation magazine in Spring 2011:
Economists and policy analysts opposed to price gouging laws have relied on the simple logic of price controls: if you cap price increases during an emergency, you discourage conservation of needed goods at exactly the time they are in high demand.
Simultaneously, price caps discourage extraordinary supply efforts that would help bring goods in high demand into the affected area.
In a classic case of unintended consequences, the law harms the very people whom lawmakers intend to help. The logic of supply and demand, so clear to economists, has had little effect on price gouging policies.
Because of this, Giberson noted, the “price gouging laws of Tennessee and North Carolina, and those of the 30 or so other states with similar laws on the books, are something of a puzzle for economists.” That’s because the laws “almost certainly reduce overall economic welfare” without even creating “the concentrated benefits sought by interest groups.”
In other words, who benefits? Consider a situation in which North Carolina is hit hard by a hurricane, and North Carolinians need lumber, water, gasoline, generators, etc. North Carolina’s price-gouging law would prevent outside suppliers from changing their normal plans of supplying other areas with those goods.
They wouldn’t be able to afford to make such expensive changes to their distribution (what Giberson called “extraordinary supply efforts”). Not if they could only charge the same price they’d charge if nothing had ever happened. Something major did happen.
Who benefits from all those supply plans not changed? North Carolinians on the plus side of first-come, first-served, and after that, consumers in other states. They don’t have to compete with stricken North Carolinians for those supplies; they don’t have to try to outbid them.
So the effect of North Carolina’s price-gouging law is to ensure, when disaster strikes here, that we run out of necessary goods while people in other states don’t even have to worry about competing with us for what we need.
What kind of law is that?
Instead, price gouging laws appear more akin to laws banning the sale of horse meat for human consumption, “Blue laws” that prevent the sale of certain items on Sunday, or laws that once prohibited interracial marriage. The laws put the force of government behind efforts to prevent people from entering into agreements or transactions that lawmakers find objectionable.
In this viewpoint, price gouging keeps retailers from being tempted by the sin of market pricing, when market pricing reflects a localized greater relative scarcity. The price-moralizers characterize it as “taking advantage of people.”
Gov. Roy Cooper captured that sentiment quite well last year as attorney general and gubernatorial candidate: “A supply crunch shouldn’t be an excuse to rip off people who need gas.”