Price Gouging

The Virginia Senate just passed the Virginia Post-Disaster Anti-Price Gouging Act of 2004, which now awaits Gov. Mark Warner’s signature. In part, the act says, “During any time of disaster, it shall be unlawful for any supplier to sell, lease, or license, or to offer to sell, lease, or license, any necessary goods and services at an unconscionable price within the area for which the state of emergency is declared. Actual sales at the increased price shall not be required for the increase to be considered unconscionable.”

Background for the law was last year’s devastating impact of Isabel, a category-five hurricane that caused widespread property damage and destruction in parts of Virginia that included losses associated with power outages, flooding and wind damage. In Virginia alone, Isabel’s death toll was about 36, with many more injured. The hurricane’s effects were felt for months and in many cases still linger.

Whenever a major disaster strikes, the public is confronted with all sorts of unpleasantness. The source of the unpleasantness is a sudden change in scarcity conditions: The immediate demand for many goods and services exceeds their immediate supply. What to do? The typical response is for prices to rise dramatically. While buyers are not thrilled by rising prices, rising prices are one of the ameliorative responses to changes in scarcity conditions. They get people to voluntarily do what’s in the social interest. Let’s look at it using a couple of goods and services important to disaster recovery and ask a question or two.

In Isabel’s wake, private contractors from nearby states brought their heavy equipment to Virginia to clear fallen trees from people’s houses. Producers and shippers of generators, plywood and other vital supplies worked overtime to increase the flow of these goods to Virginians. What was it that got these people and millions of others to help their fellow man in time of need? Was it admonitions from George Bush? Was it conscience or love for one’s fellow man?

I’ll tell you what it was. It was rising prices and the opportunity for people to cash in on windfall profits. Windfall profits are one of the vital signals of the marketplace. It’s a signal saying that there are unmet human wants, leading people to strive to meet those wants. It stimulates the supply response to a disaster.

Imagine for a moment that prices aren’t allowed to rise. Would it be reasonable for anyone to expect workmen to give up their nights and weekends and drive hundreds of miles to Virginia to remove trees from people’s houses? Yes, there would be some motivated by charitable instincts, but I’d hate to count on charitable instincts as the major source of help. If, as the Virginia Senate has decreed, prices are not allowed to rise in the wake of a disaster, lest they risk being deemed unconscionable, pray tell me what will produce the incentive for people to travel long distances, work overtime and make other personal sacrifices to provide goods and services to Virginians?

The Virginia Senate has provided a defense for sellers against charges of selling goods at an “unconscionable” price, saying, “Proof that the supplier incurred such additional costs during the time of disaster shall be prima facie evidence that the price increase was not unconscionable.” That vision reflects gross economic ignorance on the part of the Senate. Costs alone do not determine price; demand plays a role as well. When there’s a disaster, demand is likely to be the major element driving prices up.

Here’s my recommendation to the governor and Virginia legislature if they’re really interested in doing something about price gouging. Their energies would be better focused on their ever-increasing charges for government services and their subsequent tax gouging of Virginia taxpayers.