CTIR Episode 84: Price Gouging

Introduction

· Over 20,000 downloads?

Summary

· Price gouging is the raising of prices during a natural disaster.

· It is prohibited in most – if not all states – with mostly large civil fines and some states with criminal prosecutions.

· Does NOT violate the non-aggression principle.

· Most dislike it based on “moral” implications or “feelings.”

· But price gouging is a natural and healthy price mechanism during natural disasters. It drives prices up, which increases supply (as producers will want to make money) and leads to conservation.

· But even if it is illegal…how do poor people get access to items when everything is sold out? Few answers here (thus, price controls).

Why talk about it?

· Continuation of Uber and Taxi cab regulations.

· Will continue this in a soon to be future episode about price controls.

Price Gouging

· Raising prices during a natural disaster.

· Prohibited in most states.

o Florida.

§ “During a state of emergency, it is unlawful to sell, lease, offer to sell, or offer for lease essential commodities…for an amount that grossly exceeds the average price for that commodity during the 30 days before…unless the seller can justify the price by showing increases in its prices or market trends.”

· Examples of commodities: ice, food, gas, and lumber.

· Non examples: cigarettes, alcohol.

§ Those selling these goods and serves must possess an occupational license.

§ Hotline to call if you notice a store charging higher.

§ Penalties of up to $25,000 per day for multiple violations.

o California.

§ Prohibits sales or offers to sell consumer goods and services at a price of more than 10% above the price charged immediately prior to the emergency.

· $2500 per violation; plus injunction or restitution. Criminal penalties are available.

§ Kentucky.

· “Grossly in excess.”

· $5000 initial offense; $10000 for each additional.

§ Virginia.

· “Unconscionable.”

· $25,000 per willful violation.

Examples

· Hurricane Sandy (Fall 2012).

o NJ Governor Chris Christie threatened price gougers with stiff penalties.

§ Merchants are barred from raising prices more than 10% over their normal level during emergency conditions.

· Tropical Storm Irene (Fall 2012?).

o A NJ gas station owner was hit with a $50,000 fine for price gouging. He raised the prices 17% when the storm hit.

· Hurricane Charley (Fall 2004).

o Many news anchors, before the storm in Florida, complained that we don’t need vendors to take advantage of the storm by raising prices for emergency supplies.

o Before Charley hit, few in central FL had stocked up on ice. When the storm hit, many were deprived of electrical power and thus refrigeration. The demand for ice increased.

· Uber (2014).

o After an armed gunman took patrons of a Sydney chocolate shop hostage during rush hour Monday morning, Uber quadrupled its fairs. It charged a minimum of $82 to escape. Due to public outcry, it backtracked and instead provided free rides out of the area as well as refunds to those who paid the higher price.

o Additionally, in NY city, Uber has agreed to charge a maximum of $39 per mile and $9.50 per minute; Lyft has a maximum rate of $6.43 per mile and $1.20 per minute.

o Uber also has a new national policy to cap surge pricing during states of emergencies. The cap would be set based on the surges of the previous two months, and 20% of the total fare would be donated to the American Red Cross’s disaster relief efforts.

· North West Co. grocery stores (2015).

o North West is a Canadian corporation that owns 33 Alaskan stores in rural Alaska and also owns 122 Northern stores in Canada, which is the only grocery store available for many Inuit families. “The practice of price gouging at North West stores has contributed to too many families not having enough food to eat.”

§ In the majority Inuit territory of Nunavut, 70% of preschool age Inuit children live in homes where there isn’t enough food.

· Statistics that were missing from the article:

o 29% were obese; 39% overweight.

o High prevalence of public housing, income support, and crowded homes.

§ At one store, one can find $11 gallons of milk, $7 loaves of bread, eggs for $6.50 a dozen.

· However, the area simply has a higher standard of living (higher costs for everything including housing and energy) as well as only 2-3 main stores for a large area.

o Estimated median household income in 2012: $72,470.

o Population of about 3,000 people.

o The nearest city with a population of over 50,000 people is anchorage, AK over 550 miles away.

o 16% unemployment in 2014; 6.7% in AK.

· Some have actually started ordering food from Amazon who provides free shipping to orders over $35.

§ In Canada, the federal government tried to help by giving these stores money to reduce prices, but it failed. It is a $60 million program used to help offset the cost of food, which can be more expensive because of increased shipping fees (some don’t even have roads). But the government doesn’t require merchants report their profit margins.

· College textbooks.

o The average student spends about $1,200 per year on books and supplies. A single book can cost as much as $200.

o Between 2002 and 2013, the price of college textbooks rose 82% - nearly three times the rate of inflation.

o Price gouging or something else?

§ Student loans.

§ Professors don’t care.

§ Copyright laws.

· Fair use.

o Guidelines permit a teacher to make one copy of any of the following: a chapter from a book; an article of a newspaper; a chart or picture from a book.

o May hand out photocopied articles in class but there are restrictions. Can NOT be used to replace texts. Number of copies cannot exceed more than one copy per pupil. A copyright must be affixed to each copy.

§ But the article must be less than 2,500 words.

o Only nine instances of such copying for one course during one school term are permitted.

o May NOT photocopy workbooks, texts, or other materials created for educational use.

Perspectives

· “These laws are built on the quite conventional view that it is unethical for a business to take advantage of a disaster in pursuit of profits. It just seems wrong for business owners to make money on the misery of their neighbors. Merchants earning larger profits because of a disaster seem to be rewarded for doing nothing more than raising their prices.”

o “It’s reverse looting.”

· “Gas station owners cannot force us to buy gasoline…They can only offer us a trade, which we are free to accept or reject.”

o Reply: “But how free is the independent trucker, or the taxicab driver, or the traveling salesperson? How free is the service worker who can’t live in the expensive city where she is employed because the cost of housing is so high but has to live thirty miles away, where there is no public transportation?”

· “It’s coercive and cruel. Price gouging deliberately takes advantage of people when they are desperate and need the most help.”

· Michael Sandel, professor at Harvard (Justice: What’s the Right Thing to Do?”: “But the outrage at price gougers is more than mindless anger. It gestures at a moral argument worth taking seriously. Outrage is the special kind of anger you feel when you believe that people are getting things they don’t deserve. Outrage of this kind is anger at injustice.”

o “Price gouging laws cannot banish greed, but they can at least restrain its most brazen expression, and signal society’s disapproval of it. By punishing greedy behavior rather than rewarding it, society affirms the civic virtue of shared sacrifice for the common good.”

· Uber: “Surge pricing in times of need is important – even beneficial – because it encourages drivers who might otherwise stay safely at home to hit the streets. This is a fair point. If there’s any time that people would want drivers to be incentivized to pick up passengers, it’s during a disaster or emergency. Raising fares helps make that happen.”

o Reply: Uber should “give one ride to each customer free of charge while paying drivers the surge rates out of its own pocket to keep more of them on the road.”

Solutions

· The Ruling Class.

o It is unfair because the poor will be denied access to products.

§ These laws encourage selling goods on a first come first serve basis. Is this fair?

· Libertarian.

o Non-aggression principle.

§ Aggression against another is immoral.

§ Aggression is the initiation of the use or threat of physical violence against another.

§ Threat is probable imminent action.

§ Another is a human and his or her property.

§ Self defense is a reasonable or proportional response to aggression.

o This is voluntary exchange if based on consent.

§ Price mechanisms ensure that when there is any dramatic change in the supply of a good or the demand for a good, economic actors can respond accordingly. When demand increases, prices go up. When demand lowers, prices will go down.

§ It also acts as a powerful incentive to conserve and for people to find ways to supply more products.

· Example – After Hurricane Katrina, a man thought he could make some money so he bought 19 generators. He went from Kentucky to Mississippi to provide people with power. He offered to sell the generators for twice what he paid and people paid for them. He was jailed for four days for price gouging and his generators were taken away.

§ Example – Hurricane Charley (ice).

· Let’s say a small store has ten bags of ice that had been selling for $4 per bag before the storm. Of this stock, it could normally expect to sell one or two bags a day. After the hurricane hits, ten residents show up to buy ice. Most want more than one bag. If the price is kept at $4, the first five people could buy all ten bags. The last five people would get no ice. If the vendor raised the price to $15 a bag, people would likely only buy one or two bags. Thus, more people (of the ten) would have ice. Of course, the price couldn’t go too high because there would be another vendor down the street selling the ice for $14 and so on. It would also likely keep the store open for longer as well. Additionally, buyers would remember if the store sold an item for too much or if it ran out. They may be less likely to shop there after the storm.

· The Golden Rule.

o Treat others the way you would want to be treated.

Conclusion

· Price gouging is a natural and healthy price mechanism during natural disasters. It drives prices up, which increases supply (as producers will want to make money) and leads to conservation.

· It is voluntary, based on consent, and no force is used.

In Episode 84 of CTIR, I discuss price gouging. Specifically, I analyze the concept of government intervention of the price of goods in times of a natural disaster.

Critical Thinking is Required is a political and educational podcast for individuals with endless curiosity.

Thank you for listening to CTIR. If you enjoyed the show, please share it with your friends.

http://criticalthinkingisrequired.com

Thank you Mevio’s Music Alley for providing license free music.

The intro song is titled "I Disagree" by 20 Riverside.

The outro song is titled "Good Medicine" by 20 Riverside.

Sources:

http://mises.org/library/price-gouging-saves-lives-hurricane

http://myfloridalegal.com/pages.nsf/Main/5D2710E379EAD6BC85256F03006AA2C5?OpenDocument

http://www.slate.com/articles/business/moneybox/2012/10/sandy_price_gouging_anti_gouging_laws_make_natural_disasters_worse.html

http://www.npr.org/blogs/money/2012/10/29/163861383/why-economists-love-price-gouging-and-why-its-so-rare

http://www.washingtonpost.com/news/morning-mix/wp/2014/12/15/uber-backtracks-after-jacking-up-prices-during-syndey-hostage-crisis/

http://www.cnbc.com/id/49622944#.

http://www.aei.org/publication/in-defense-of-price-gouging-and-profiteering/

http://www.cato.org/publications/commentary/let-em-gouge-defense-price-gouging

http://www.capitalnewyork.com/article/city-hall/2015/01/8559993/city-council-seeks-stifle-it-uber-grows

http://www.technologyreview.com/review/529961/in-praise-of-efficient-price-gouging/

http://www.adn.com/article/20150128/alaskans-should-join-arctic-wide-food-price-protest-jan-31-and-boycott-ac-stores

http://www.sciencedaily.com/releases/2010/01/100125123223.htm

http://www.cbc.ca/news/canada/north/nutrition-north-s-impact-on-northerners-uncertain-auditor-general-says-1.2848653

http://www.thearcticsounder.com/article/1449store_to_bring_lower_prices_to_kotzebue

http://www.city-data.com/city/Kotzebue-Alaska.html

http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=13&cad=rja&uact=8&ved=0CCwQFjACOAo&url=http%3A%2F%2Fapps.americanbar.org%2Fantitrust%2Fat-committees%2Fat-fe%2Fpdf%2Fprograms%2Fspring-06%2Fprice-gouging-statutes.pdf&ei=9wTLVI-fCImeNvzSgbgN&usg=AFQjCNEcgvX4SiYb3vxi53At0s8-yT8vag&sig2=RANVNKtFQ8S804UZOogWuA&bvm=bv.84607526,d.eXY

http://www.slate.com/blogs/moneybox/2014/12/15/uber_sydney_hostage_crisis_it_s_time_for_uber_to_re_evaluate_how_it_prices.html

http://www.usatoday.com/story/money/personalfinance/2014/02/02/cnbc-college-textbooks-expensive/5038807/

http://www.brighthubeducation.com/teaching-methods-tips/6623-understanding-copyright-law-and-fair-use-for-teachers/

http://www.progressive.org/news/2006/04/3320/gouging-market

http://abcnews.go.com/2020/Stossel/story?id=1954352

http://www.today.com/id/32883069/ns/today-today_books/t/price-gouging-wake-hurricane-wrong/#.VMxViC6GNSd

http://fee.org/freeman/detail/theres-some-good-in-gouging

http://www.huffingtonpost.ca/peter-mccaffrey/5-reasons-price-gouging-is-okay_b_3487621.html

http://www.rightlywired.com/why-price-gouging-is-wrong-and-stupid/