Anxious consumers across the country are raiding stores, emptying entire shelves of paper products, pain killers, soap, hand sanitizers, and frozen food. In response, some states are invoking anti-price gouging laws. Others will follow. All will make matters worse.
Attorney General Mark Herring from Virginia, where Gov. Ralph Northam has declared a state of emergency, is asking “all Virginians to pay attention to any prices that seem too high, and contact my office as soon as possible if you think someone may be illegally overcharging for necessary goods.”
New York Attorney General Letitia James told National Public Radio Friday that her office had “issued a total of six letters to merchants for price gouging of hand sanitizers and disinfectant sprays.”
These are just a couple of a number of states in which anti-price gouging laws are in effect or where the attorney general is making threats against sellers who would charge market prices for goods. We can expect others, whipped into a frenzy by ignorant and irresponsible media reports, as well as the usual “public interest” agitators, to do the same.
And it all sounds so consumer friendly. After all, who wants to pay $79 for hand sanitizer?
Cracking down on market prices, which, whether we like them or not, are often higher than we are comfortable with and sometimes higher than we can pay, might feel good. But doing so will not restock vacant shelves. It will only keep them empty.
While it is counterintuitive to most, the reality is that price gouging is “a life-saving market mechanism.”
“When a disaster is incoming, such as a hurricane or a blizzard, people will see others at grocery stores stocking up on water and other essentials,” explains T.J. Roberts, writing for the Mises Institute.
“They will, however, purchase too much if the price stays the same. Whereas a storm and its immediate aftermath may last for a few days, people will purchase enough to last them for months, resulting in shortages.”
When government doesn’t distort markets with price ceilings, price signals tell sellers where they should ship their goods. If a lumber company, for instance, sees prices for plywood rising due to increased demand in coastal areas threatened by a storm, it will divert to those zones inventory that would otherwise be shipped elsewhere.
“Higher prices during emergencies attract resources,” says economist David Henderson, “from other parts of the country.”
Artificially holding down prices also discourages valuable entrepreneurship. In times of normal pricing, it makes no economic sense to spend more to move goods to a market than will be reaped in revenue. But in moments of crisis, it makes economic sense for enterprising souls to rush scarce goods to affected areas if they are allowed by government to profit from their efforts.
One of the most absurd and infuriating stories that illustrates how foolish it is to crack down on entrepreneurship comes from 2005’s Hurricane Katrina disaster.
When John Shepperson saw many had lost power from the storm and needed generators to restore electricity to their homes, he was inspired. The Kentucky resident bought 19 generators, rented a truck, and drove “600 miles to a part of Mississippi that had no electricity,” John Stossel reported. While he could have probably charged more, he offered to sell the generators for twice what he paid for them.
“People were eager to buy,” says Stossel. “But Mississippi police said that was illegal.”
So Shepperson was arrested for the crime of selling a legal good to willing buyers.
Who, then, benefited from Mississippi’s anti-price gouging law? Not those who needed power. The police confiscated Shepperson’s generators, said economist Mark J. Perry, and they “never made it to consumers with urgent needs who desperately wanted to buy them.”
Giving in to emotion and demanding that government control prices is dangerous, as is ignorance of basic economics. But both go to work during times of crisis. This shouldn’t happen in an advanced nation, yet it does and it’s as predictable as Earth’s rotation. If we had learned an elementary lesson decades ago, as we should have, there’d be fewer scenes of shoppers brawling and screaming at each other because the risk of shortages would be reduced.
— Written by J. Frank Bullitt