Time to once again address a topic I like to rant about: price gouging. Two days ago, New York Attorney General Eric Schneiderman posted the following letter/warning to businesses in New York.
January 7, 2014
This open letter is addressed to anyone selling necessary consumer goods and providing essential services to the Western New York region during today’s severe winter weather event.
New Yorkers will rely upon you for the items needed to prepare for, weather, and recover from these extreme conditions, as we all stock up on water, food – including staples such as bread and milk – batteries, de-icers, sand, generators, fuel and other essentials. Perhaps even more, we will rely on you to assist us in clearing our streets and recovering from the damage left to our trees and homes. It can be a thankless responsibility, and we all owe you our gratitude.
While most understand that customers are also neighbors and would never think of taking advantage of others during such disruptive times, these circumstances always require an extra sense of vigilance and preparation.
This notification should serve as a reminder to vendors and their consumers that state law prohibits price gouging at times when nature demonstrates its disruptive fury. The New York General Business Law forbids those who sell essential consumer goods and services from charging excessive prices during what is clearly an abnormal disruption of the market. Those who do so will ultimately see a reduction in their profits and will be faced with penalties, fines and directives to set up reimbursement funds.
As Attorney General, it is my responsibility to enforce the price- gouging law, and while it is my hope that I will not need to do so, my office is certainly prepared. We will review pricing data and take such complaints filed with my office seriously, as we do with any matter.
New Yorkers have always been at their best when facing adversity, and I am confident that we will live up to that standard throughout this storm recovery.
Eric T. Schneiderman
New York State Attorney General
Now I am slightly sympathetic to AG Schneiderman's position. After all, he doesn't write the laws, he just enforces them. So in his defense, the following is addressed to NY State Legislators and legislators in any other state, municipality, country...: Price gouging laws are not good policy.
First let's examine why price gouging laws are perceived to be necessary in the first place. In times of significant events such as natural disasters, snow storms, arctic hurricanes, polar vortices, attacke by Death Star, demand for essential goods and services will increase. And we all know that when demand increases, prices rise.
Couple with that the likelihood that in such instances demand will be highly inelastic in the shortrun because of disruptions to supply chains and delivery of essential goods and services, the sudden demand increase will result in dramatically higher price increases.
This isn't an opinion, it's not a consequence of an unfair system, it's a fact. Prices of essential goods and services can, will and should rise in times of natural disaster. Does that mean some people will be forced out the market? Yes. Does that mean some people who need certain goods and services will be unable to get them? Yes. Is that uncomfortable, unfortunate, unfair, unwhatever? Yes, yes, yes, and yes.
But, what is the alternative? Controlling prices thorugh price capping (gouging) laws? When we cap prices in a market, the result is mopre people wanting the good at that price than are able to get it. We call that a shortage. Does that mean some people will be forced out the market? Yes. Does that mean some people who need certain goods and services will be unable to get them? Yes. Is that uncomfortable, unfortunate, unfair, unwhatever? Yes, yes, yes, and yes.
You see, price adjustments ration goods. Rather than a government deciding who gets what, the interaction between demanders and suppliers lead to price adjustments which ration goods. While the outcome is uncomfortable, unfortunate, unfair, unwhatever, the outcome is efficient.
I know we like to try to count on human kindness in times of distress, and I too get angry when I have to pay mopre in in time of distress, but really, who is to blame when prices rise? Is it the evil business owner who is simply charging what people are apparently willing and able to pay? Or is it the legion of demanders who suddenly find themselves in sudden need of goods and services in short supply thus being willing to pay more?
While the answer is uneasy to take. It's how markets work to ration goods and services in a way that makes the most of scarce resources.
Over time, supply routes will be restored, delivery will resume, demand will decrease back to 'normal' levels and prices will once again drop. Until then, we might have to deal with higher prices.