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Price Gouging and Increased Costs

July 16th, 2016
money, econ

When a business raises prices in response to increased demand after a disaster, that's price gouging and is often illegal. New Jersey famously enforced this after hurricane Sandy, issuing stern warnings and then suing them after the fact. I recently read a response to this enforcement that argued these laws were clearly harmful:

If New Jersey gas stations were allowed to sell gas at $20, the price would have stayed at that level for at most 3 or 4 hours. That's how long it takes to fill up a tanker in Pennsylvania or Maryland and drive to Jersey.
...
Many gas stations had generators that would power the pumps, but running the generators costs more than electricity from the grid does, and without raising prices by more than 10% that gas stations couldn't break even while running generators. In case this isn't clear: there is gas in the ground, there are pumps to pump the gas, there are generators to power the pumps, there are people desperate to buy the gas, there is a law that prevents them from doing so, there is someone dying in a hospital because their doctor can't get there to help them.

This is a common misunderstanding the way price gouging laws work (and one I've made myself). A store simply charging more for what's already on their shelves is gouging, but passing along increased costs, with their customary markup, is generally not. For example, the NJ law they're objecting to has:

"Excessive price increase" means a price that is excessive as compared to the price at which the consumer good or service was sold or offered for sale by the seller in the usual course of business immediately prior to the state of emergency. A price shall be deemed excessive if:
  1. The price exceeds by more than 10 percent the price at which the good or service was sold or offered for sale by the seller in the usual course of business immediately prior to the state of emergency, unless the price charged by the seller is attributable to additional costs imposed by the seller's supplier or other costs of providing the good or service during the state of emergency;

  2. In those situations where the increase in price is attributable to additional costs imposed by the seller's supplier or additional costs of providing the good or service during the state of emergency, the price represents an increase of more than 10 percent in the amount of markup from cost, compared to the markup customarily applied by the seller in the usual course of business immediately prior to the state of emergency.

 —NJ 56:8-108

Now, there is an economic case agaist having price gouging laws, like the one Yglesias makes in Slate: businesses raising prices in response to increased demand helps allocate things to people who need them more urgently, and being allowed to raise prices like this can make investments in emergency preparedness worth doing. And I think this case is strong enough that I don't think we should have price gouging laws, or other price floors/celings. But "costs have gone up, and you aren't allowed to pass this along to the consumer" isn't the problem in NJ.

(The increased costs restriction does, however, appear to have been a problem in MS during Katrina. John Shepperson drove 19 generators 600 miles from KY to MS after Katrina to sell at twice what he paid for them. The police confiscated the generators, and jailed him for four days. I can't find any followup to this story, so I don't know how it was resolved, but it looks to me like the problem is that MS law allows you to pass on increased costs but not (as NJ does) to make a profit. Using todays prices as an estimate, if the generators cost $200 each, gas was $3/gal, uhaul charged $.89/mile and $40 for two days, the truck got 9mpg, he took 24hr at $15/hr, and he collected paid MS's 7% sales tax, then for his expenses I get $6,196 with an income, if not stopped by the police, of $7,600. This is a 23% markup, which is within what NJ would have allowed if a typical markup is at least 13%. But MS's exception for passing along increased costs doesn't allow any profit at all: Shepperson would have had to transport the generators and sell them at cost, bearing all risk himself, which of course is not going to be worth it.)

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