According to Wikipedia, price gouging is “a situation in which a seller prices goods or commodities much higher than is considered reasonable or fair.” Thirty eight states have price gouging laws that generally prohibit raising prices during disasters on goods that are deemed essential and necessary. Sounds like a good idea, right? After all, states should crack down on suppliers who take advantage of the common folk for profit.
But consider a couple of scenarios. Suppose that service stations in the town of Smallville sell gas for an average of $3.50 a gallon on a typical Tuesday. The retailer has no immediate concerns about supply disruptions and the demand for gas is like any other day. Some drivers will fill up their tank on Tuesday; some will wait until another day. Thus, supply and demand are in a state of general equilibrium.
Suppose, however, that a hurricane is headed to Smallville and is expected to make landfall on
Friday. If a state of emergency is declared and evacuation is required, all of the drivers who would have waited until the weekend to fill up their tanks will be scrambling to get gas on Wednesday and Thursday before the hurricane hits. This spike in demand warrants an equal response from the supplier, which means a price increase. If prices remained at $3.50 a gallon during a peak demand period, the first drivers to get to the pumps would fill up their tanks completely or top them off, giving them more than enough to evacuate. The result would be an almost immediate shortage for other drivers.
Suppose that prices rose to $5.00 a gallon in response to a peak in demand and an anticipated supply shock? Considering the need to escape impending doom, drivers will most certainly pay $5.00 a gallon. But, they may alter their behavior at the pump by purchasing fewer gallons —just enough to get them to out of the hurricane danger zone. Or they may buddy up with others and chip in on a ride. The likely result would be that those who want gas will be able to get it, regardless of the price.
An economics professor once told me that lowest price viagra “price is sacred.” There is no reason for blaspheming the price rationing mechanism during times of disaster.
If states’ attorneys general wish to pursue swindlers during natural disasters they should instead focus their efforts on suppliers who come into disaster-stricken areas promising goods and services they do not deliver. Rationing by price should not be criminal — but consumer fraud is.