Monday, September 19, 2016

North Carolina's Idiotic "Price Gouging Law" Increases the Pain

When anything becomes more scarce, the price MUST GO UP. Additionally, if something suddenly becomes more useful, the price will also go up. The price going up is a GOOD thing, and this is what people need to understand. Threatening businesses with fines for selling something we need is not going to magically make more of that thing appear in the state... quite the opposite.

Many states have "price gouging" laws.  In North Carolina the law basically has two provisions:

1) The Governor or President has to declare that some sort of "triggering event" has occurred.
2) Then you can't charge a price that "unreasonably excessive". What that means is left unclear.   However, you can be fined $5,000 for each violation, which probably means for each sale made to a customer.

Our esteemed governor of North Carolina declared a triggering event has occurred due to the Colonial Pipeline leak that was discovered on September 9th, 2016. Because this pipeline supplies almost all of the gasoline to the area, gasoline is much more scarce, and the price should go up for two good reasons:

1) Existing gasoline should become more expensive in order to encourage conservation-- people will treat this more precious commodity as more precious, and try to use less where they can.
2) When the price is higher, there is an incentive for people to find other ways to transport this good into the affected areas.  At a high enough price, it will be worthwhile to ship gasoline by truck or train into North Carolina, to help alleviate the fact that there is little gasoline to be found.

In economic terminology, the Price Gouging Laws basically put a price ceiling on the price of gasoline, keeping the price from going up. Gas prices have risen a little bit, but no gas station can know at what point they will be put out of business for charging a price that is "unreasonably excessive", and fined thousands of dollars.

So, the result is predictable, just as when Nixon did it back in 1971.  When you don't allow the price to increase, people don't conserve, and people don't find ways to being in additional supplies.  These laws only make a bad situation worse. So, gas stations are just shutting off the pumps, and people are driving around for many miles hunting for gasoline (which again, is wasting gas, not to mention time).  Which raises the question: 

"Which would you rather have: no gasoline at a low price, or as much gasoline as you would like at a higher price?"

WFMY News 2's Meghann Mollerus met several drivers Monday morning who said they weren't as concerned about the price as they were about finding gas at all. "I just wanted some gas. It didn’t matter how much it was going to be. I had to get gas," said Chad Levens, who commutes 35 minutes...

I think this answers the question for us.  However, these same news reports are all practically begging people to report any prices that they think are "unfair" to the State Attorney General.

I highly recommend the following 5 minute video for people who aren't convinced about how bad these laws are: Is price Gouging Immoral? Should it Be Illegal?

Below is my brief overview of the three common cases where people scream "Gouging!", and  my thoughts, reiterating some of the above notions, and covering two additional cases.
"Gouging" to ordinary folks seems to mean "they raised the price, and that is unfair". There are three common cases I can think of where gouging occurs:

1) There is a sudden reduction in supply, which can mean an increase in costs or reduction in availability (in this case, pipeline goes down). There is less gas. What should we do? If we gold the price down we won't have more gas, what we do have will be wasted, and we will quickly run out. If we allow prices to rise, people will conserve, people who need it desperately (ambulances, fire trucks, people going to work) will be able to purchase it. And, there is an incentive for people to bring more in using trucks, etc.

2) There is a sudden increase in the need for something- for example, normally I don't need a generator, but after a hurricane I want one more and am willing to pay more. But, so does everyone, and there are only so many generators around. If we hold the price down, people who get there first will get the hotel rooms/generators. If we allow the price to rise, people who desperately need them (e.g. your son needs one to power some medical device) will be able to find one, people who have an extra might be willing to sell one, and people will be willing to drive 500 miles to buy some and truck them in. The same can be said for ice, bottled water, etc. The choice is between having shortages at the normal price, and having more and used more wisely at a higher price.

In the above two cases, allowing the price to rise actually helps things work more smoothly. Some price gouging laws give businesses a defense in the first case, but never in the second.  In both cases, keeping the price low helps a few random people that can find the scarce good at the low price, but at the expense of people who might have a greater need, and at the expense of actually getting more of the product brought in.

3) The third case is one where I have more sympathy with people, since raising prices doesn't clearly have any immediate effect of conserving or encouraging people to supply more. This is the recent case of drug manufacturers such as Epi Pen (increased from $100 to over $600) or Daraprim (went from $13.50 to $750). While I DO support drug manufacturers' right to price high for new drugs (because there is a lot of expense and risk with developing and selling them), Epi Pens should be generic now, save for a stupid trick the FDA allows drug makers to use to extend patent life (though there IS a generic version, click here for more info), and Daraprim is generic, but there is only one plant approved by the FDA to make it.

In this Case 3, I would rather we go after the FDA than the businesses, though yes, they disgust me. However, "disgusting me", in my opinion, is not a reason to put someone in jail or put them out of business. It is the FDA's rules that allow the patent to continue in the first case, and prevent other companies from producing the drug in the second. If the Daraprim case is one where having a monopoly makes sense (due to efficiencies of scale), then economists would argue that this is a case of a natural monopoly that should be regulated (similar to how electric utilities are regulated).