Virginia’s anti-price gouging law hurts vulnerable consumers

170226W5_NL_smWhile it looks now like most of Virginia will miss the worst effects of Hurricane Joaquin as it travels up along the Atlantic Coast, the Commonwealth is still under a state of emergency declared by Governor Terry McAuliffe. Even central and western parts of Virginia are expected to get drenched with up to six inches of rain and Tidewater will get both rain and wind even if Joaquin bends toward the ocean, as current forecasts predict.

One of the consequences of Governor McAuliffe’s declaration of a state of emergency is that it triggers the invocation of Virginia’s anti-price gouging law, which was passed by the General Assembly just over a decade ago at the urging of Governor Mark Warner (D) and Attorney General Jerry Kilgore (R), after first being proposed in 1996 by then-state Senator Ken Stolle (R-Virginia Beach). The bill that became law was patroned by Delegate Melanie Rapp (R-Williamsburg).

A news release from the office of Attorney General Mark Herring explains how the law works:

Enacted in 2004, Virginia’s Anti-Price Gouging Act prohibits a supplier from charging “unconscionable prices” for “necessary goods and services” during the thirty day period following a declared state of emergency. Items and services covered by these protections include but are not limited to: water, ice, food, generators, batteries, home repair materials and services, and tree removal services. A price is considered “unconscionable” if the post-disaster price grossly exceeds the price charged for the same or similar item or services during the ten days prior to the state of emergency.

Herring added this warning:

I also encourage Virginians to take note of prices while seeking goods and services during and after a declared state of emergency, and be weary of exceedingly large price hikes. Exploiting folks during and after natural disasters for financial gain is against the law and I won’t hesitate to take action against businesses that violate these protections.

While laws like this one are designed to protect consumers against unscrupulous businesses, they are actually counterproductive and end up hurting people just when they are most vulnerable and most in need. They try to defy the laws of supply and demand, which makes the support they receive from Republicans like Kilgore, Rapp, and Stolle puzzling, to say the least.

Laws aimed at preventing so-called price-gouging “almost certainly reduce overall economic welfare,” as Texas Tech economist Michael Giberson explained the problem with anti-price gouging laws in an article in Regulation magazine (2011):

The price gouging laws of Tennessee and North Carolina, and those of the 30 or so other states with similar laws on the books, are something of a puzzle for economists. Economists usually point to public goods or special interests as the mobilizing force behind regulations. Price controls, including price gouging laws, almost certainly reduce overall economic welfare. And while price controls sometimes create the concentrated benefits sought by interest groups, the benefits and costs of price gouging laws are widely dispersed and uncertain in impact — hardly the kind of prize lobbyists usually pursue.

Kevin Hassett of the American Enterprise Institute states succinctly that

Anti-gouging moves are bad for two big reasons. First, it’s essentially impossible to distinguish gouging from normal pricing behavior. Laws against gouging merely introduce legal uncertainty and the potential for abuse.

Second, gouging – as it is commonly understood – is just the efficient working of the price system. Interfere with high prices, and you do more harm than good.

Think of it this way: Prices are a signal to buyers and sellers that help to determine the demand and supply of goods and services. When demand goes up and supply stays static, the price rises. If supply can meet the demand, the price will become lower or, at least, remain stable. When the government interferes with the price signal, suppliers will be less willing to provide goods and services, especially if it means selling at below their cost.

Matthew Yglesias — not often seen to be a conservative or libertarian thinker — wrote in the wake of Superstorm Sandy in Slate three years ago:

The basic imperative to allocate goods efficiently doesn’t vanish in a storm or other crisis. If anything, it becomes more important. And price controls in an emergency have the same results as they do any other time: They lead to shortages and overconsumption. Letting merchants raise prices if they think customers will be willing to pay more isn’t a concession to greed. Rather, it creates much-needed incentives for people to think harder about what they really need and appropriately rewards vendors who manage their inventories well.

Yglesias continued:

Greater flexibility to raise prices would not only tend to curb overconsumption directly by encouraging people to buy less, it would inspire confidence that shortages wouldn’t arise, reducing the tendency toward panicky preemptive hoarding.

Last but by no means least, more price gouging would greatly improve inventory management. There is a large class of goods—flashlights, snow shovels, sand bags—for which demand is highly irregular. Maintaining large inventories of these items is, on most days, a costly misuse of storage space. If retailers can earn windfall profits when demand for them spikes, that creates a situation in which it makes financial sense to keep them on hand. Trying to curtail price gouging does the reverse.

Given the evidence, it’s hard to come up with a conclusion better than Texas Tech’s Giberson did in Regulation:

Laws proscribing price gouging intend to enforce a moral view that says it is wrong to take advantage of another’s pain for one’s own gain. The intention may be laudable, but the results of the laws clearly are not. Merchants and consumers would be better off without price gouging laws.

Rather than announcing his intention to vigorously enforce Virginia’s misguided anti-price gouging law, Attorney General Herring should instead try to undo the bad work of his predecessor and recommend that the General Assembly repeal the 2004 law and replace it with a public policy that better reflects basic economics.

@rick_sincere | facebook.com/ricksincere | Rick Sincere’s posts

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