Price gouging
Price gouging occurs when a seller increases the prices of goods, services or commodities to a level much higher than is considered reasonable or fair. Usually, this event occurs after a demand or supply shock. Common examples include price increases of basic necessities after natural disasters. In precise, legal usage, it is the name of a crime that applies in some jurisdictions of the United States during civil emergencies. In less precise usage, it can refer either to prices obtained by practices inconsistent with a competitive free market or to windfall profits. Price gouging may be considered exploitative and unethical.
The term is similar to profiteering but can be distinguished by being short-term and localized and by being restricted to essentials such as food, clothing, shelter, medicine and equipment needed to preserve life and property. In jurisdictions where there is no such crime, the term may still be used to pressure firms to refrain from such behavior.
The term is not in widespread use in mainstream economic theory, but it is sometimes used to refer to practices of a coercive monopoly that raises prices above the market rate that would otherwise prevail in a competitive environment. Alternatively, it may refer to suppliers' benefiting to excess from a short-term change in the demand curve.
Laws against price gouging
United States
In the United States, state laws against price gouging have been held as constitutional at the state level as a valid exercise of the police power to preserve order during an emergency, and may be combined with anti-hoarding measures.As of January 2019, 34 states have laws against price-gouging. Price-gouging is often defined in terms of the three criteria listed below:
- Period of emergency: The majority of laws apply only to price shifts during a declared state of emergency or disaster.
- Necessary items: Most laws apply exclusively to items essential to survival, such as food, water, and housing.
- Price ceilings: Laws limit the maximum price that can be charged for given goods.
When the law goes into effect
Statutory prohibitions on price gouging become effective, thus protecting people from exploitative increases in the costs of essential goods, once a state of emergency has been declared. States have legislated different requirements for who must declare a state of emergency for the price protections to go into effect. Some state statutes that prohibit price gouging—including those of Alabama, Florida, Mississippi, and Ohio—protect against price increases only once the President of the United States or the state's governor has declared a state of emergency in the impacted region. California permits emergency proclamations by officials, boards, and other governing bodies of cities and counties to trigger the state's price gouging law.What the law protects against
State laws vary on what price increases are permitted during a declared disaster. California has set a 10 percent ceiling on price increases. Florida prohibits a price increase “that grossly exceeds the average price” of that same item in the 30 days leading up to the emergency declaration. Some state laws do not define what constitutes a “gross disparity,” making it difficult for either affected residents or law enforcement to determine when price gouging has occurred, while others merely limit vendors and landlords to price increases of less than 25 percent. Laws often include exceptions for price increases that can be justified in terms of increased cost of supply, transportation, demand or storage.Enforcement
Enforcement of anti-price gouging statutes can be difficult because of the exceptions often contained within the statutes and the lack of oversight mechanisms. Statutes generally give wide discretion not to prosecute. In 2004, Florida determined that one-third of complaints were unfounded, and a large fraction of the remainder was handled by consent decrees, rather than prosecution.California
California Penal Code 396 prohibits price gouging, generally defined as anything greater than a 10 percent increase in price, once a state of emergency has been declared. Unlike other states that require the President of the United States or the state's governor to declare a state of emergency, California permits emergency proclamations by officials, boards, and other governing bodies of cities and counties to trigger C.P.C. § 396. The price protection lasts for up to 30 days at a time and may be renewed as necessary. Since October 2017, then-California Governor Jerry Brown repeatedly extended the price-gouging ban for counties impacted by the October 2017 wildfires and subsequently for the counties impacted by the 2018 wildfires. One of his last acts as governor was to extend the price protections until May 31, 2019.Even though California prohibits price hikes after an emergency is declared, the state, like many others, has virtually no price monitoring structure for oversight. Attorneys and law enforcement generally rely on news reports and word of mouth to learn about exploitative pricing practices. The District Attorney of Sonoma County has attempted to remedy this by creating its own task force focused on combatting and prosecuting price gouging.
In 2018, the California state legislature amended C.P.C. § 396 after the fallout from the 2017 wildfires. District attorneys reached out to legislators explaining how the current language of section 396 made it difficult to enforce. By the time the 2017 fires had been extinguished, the median rent had increased by more than 35 percent and the rental vacancy rate was zero. News reports detailed renters being forced out of their homes to make way for those who could afford to pay more, either with their own money or their insurance company's.
The legislature completely rewrote sections 396-. Prior to the revisions, those sections of the law had only specified that the prohibitions on price gouging could be extended for additional 30-day periods and that a violation of the law was punishable by imprisonment in a county jail no longer than one year, by a fine no greater than $10,000 dollars, or both.
The amended version went into effect on January 1, 2019 and aimed to reduce the exploitative practices that had ensued after the October 2017 fires. Section 396 stipulated, in part, that: “it is unlawful for any person, business, or other entity, to increase the rental price... advertised, offered, or charged for housing, to an existing or prospective tenant, by more than 10 percent.” While the amendment reiterated that landlords may increase the rental price by up to 10 percent if they could demonstrate that the increase in costs were directly attributable to repairs, it also clarified what could not justify an increase in rent.
An increase in rent may not be “based on the length of the rental term, the inclusion of additional goods or services, except with respect to furniture, or that the rent was offered by, or paid by, an insurance company, or other third party, on behalf of a tenant."
Florida
As a criminal offense, Florida's "state of emergency" law is an example. Price gouging may be charged when a supplier of essential goods or services sharply raises the prices asked in anticipation of or during a civil emergency or when it cancels or dishonors contracts in order to take advantage of an increase in prices related to such an emergency. The model case is a retailer who increases the price of existing stocks of milk and bread when a hurricane is imminent.In Florida, it is a defense to show that the price increase mostly reflects increased costs, such as running an emergency generator or hazard pay for workers, while California places a ten percent cap on any increases.
Opposition to laws against price gouging
In a survey of leading economists, only 8 percent agreed with a proposal to prohibit "unconscionably excessive" price gouging during natural disasters in Connecticut. 51 percent disagreed with the proposal, 15 percent were uncertain and 8 percent had no opinion. The economists opposing the proposal argued that such legislation would lead to a misallocation of resources and lead to lower supply and greater scarcity of the resources, or argued that the proposal in question was vague.Libertarian economists Thomas Sowell and Walter E. Williams, among others, argue against laws that interfere with large or exorbitant price changes. According to this view, high prices can be viewed as information for use in determining the best allocation of scarce resources for which there are multiple uses. Many libertarian economists oppose price gouging legislation and argue that it prevents goods from going to individuals who value them the most and not just to those with the greatest wealth. For example, after a storm has felled numerous trees in a locality, advocates of this theory claim that a rise in the price of chain saws will discourage their purchase by people with only a minor need for them, making them more available for those with the strongest need, rather than the most wealth. With price gouging laws in place, producers are only able to charge a price set by law, and therefore have little additional incentive to increase supply to adversely impacted areas. If producers are able to make extra profit, these theorists argue, then they will increase the supply. It is claimed that these laws lead to after-market operations as consumers with the lowest opportunity costs buy up desired resources and attempt to resell them to public at higher prices.
Critics claim that laws against price-gouging could discourage businesses from proactively preparing for a disaster. One example given in support of this view is that a business could install an expensive emergency power system for power outages. However, if it is prohibited from large price increases, the costs cannot be recovered during the relatively short amount of time when there is no power. As a result, a business that proactively prepared could not compete with others that did not. According to this theory, the end result would be needless shortages and more hardship for the public, or under extreme circumstances, it could be deadly. To correct the situation, those opposed to price gouging laws argue that if not abolished entirely, laws would have to be amended to allow the amortization of equipment that is useful only during a disaster. Unlike amortizing for tax purposes, this would account for how equipment is sporadically paid off internally with the extra revenue.
In support of the argument against price-gouging legislation, some assert that a similar situation applies to those who are outside of the disaster zone and willing to go there to sell what is desperately needed. If they are unable to recover their travel costs and be compensated for the inconvenience of staying in an inhospitable disaster zone, only the altruistic few would bother to do so. Since most anti-price gouging laws are based on the pre-disaster selling price, a person who buys needed supplies at the retail level in an unaffected area will more easily run afoul of the law than a large wholesaler would. They assert that it would be the "little guy" who could lose more on a percentage basis, in addition to the possibility of hefty fines, rather than "big business."
Opponents of anti-price gouging laws also claim that in terms of fair value, such laws could also require producers to sell goods below their market-clearing price: the market clearing price is the amount at which quantity supplied is equal to quantity demanded. According to this theory, if goods are priced above their market-clearing price then there will be a surplus of goods, and the converse leads to a shortage of goods. Thus, advocates of this theory claim that consumers would be unable to buy the necessary goods which they desire in a time of need.
According to the theory of neoclassical economics, anti-price gouging laws prevent allocative efficiency. Allocative efficiency refers to when prices function properly, markets tend to allocate resources to their most valued uses. In turn those who value the good the most will be willing to pay a higher price than those who do not value the good as much. According to Friedrich Hayek in The Use of Knowledge in Society, prices can act to coordinate the separate actions of different people as they seek to satisfy their desires.