Counterproductive price-gouging laws

Randal Rucker and Walter Thurman

Recent weeks have seen disturbing disruptions in retail gasoline markets, primarily in Southeastern states. While prices have at times risen to above $4 per gallon -- nothing new to drivers in the post-Katrina age -- news reports have also described gas lines. At stations in Charlotte, Atlanta and elsewhere, drivers simply haven't found gas at any price, prompting time-consuming searches and turning a merely painful interaction with high gas prices into an ordeal.The immediate causes of the supply disruptions are clear. Hurricanes Ike and Gustav shut down refineries in Texas and Louisiana, significantly impairing the flow of gasoline to Southeastern states. The 25 percent reduction in refinery output is comparable to the supply disruptions following Hurricanes Katrina and Rita in 2005.

But while supply disruptions cause high prices, they typically don't cause shortages. We need more than Ike and Gustav to explain the lines and frustration.

For that unhappy coincidence, one should look to the political response to high gas prices. Governors and attorneys general across the South responded to the gas price increases by wielding anti-price gouging laws and issuing threats and subpoenas to gas stations.

Anti-gouging laws are strikingly vague. North Carolina prohibits the "charging of unreasonably excessive prices in times of crisis." But what is "unreasonably excessive"? Does a hurricane in Texas constitute a crisis in North Carolina?

Governor Easley thought so, declaring the crisis state that empowered Attorney General Roy Cooper to go after gas station owners who had raised prices. Similar actions are pending in Georgia and other Southern states.
In fact, all Southeastern states have price-gouging laws that prevent prices from rising during declared times of crisis. The standard argument supporting these laws is that they prevent greedy, unscrupulous sellers of products most affected by disasters from profiting unfairly at the expense of consumers. But this reasoning is counterproductive and ultimately harms consumers. Price-gouging laws prevent prices from signaling the true extent of scarcity, and from motivating consumers and suppliers to act on the facts.

Many factors enter into a station's gas-pricing decision, and the fear of legal action has become important in recent weeks. What would happen if stations were not so inhibited? Well, prices would rise -- maybe to $5 or $6 per gallon under recent conditions.

The predictable effects of such prices increases would be two. On the demand side, drivers would face stronger incentives to reduce fuel use. They might make fewer trips to the grocery store (and buy more each trip), be more creative about finding ways to car pool to work or soccer practice, or arrange to work at home until the gas crisis diminishes.

On the supply side, some gasoline would be shipped into high-price regions as gasoline market middlemen seize the opportunity to benefit from the post-Ike disruptions. The combined effect would balance the intentions of gas sellers and buyers.

Whether the higher prices in the scenario above would primarily benefit big oil, gasoline middlemen or station owners is difficult to determine. The potential for such benefits, however, would encourage the build-up of inventories as a prelude to incoming storms like Ike.

INSTEAD OF PAYING PRICES THAT REFLECT ACTUAL SCARCITY, consumers have spent time, energy and worry trying to find where to buy a tankful of gas. In conditions of shortage, gas goes to the lucky and the persistent. And consumers' experience adds an unnecessary component to demand, as the prospect of future search and disappointment engenders fear and tank-topping. Drivers with half-full tanks, who happen upon a station with gas, pull in to fill up because later in the week gas might be hard to find. If drivers were to see higher prices now -- and didn't anticipate shortages later on -- the incentives to tank-top would disappear, reducing current demand and moderating the effects of the supply disruption.

As we are seeing in the Southeast, price-gouging laws offer alternatives to higher gas prices that may not be attractive. Consider the driver who, after searching for an hour, waits in line for another hour, then finds that as she gets to the front of the line, the station runs out of gas. Would she prefer this experience over the option of gas at, say, $5.50 per gallon that she can actually purchase with little or no waiting in line?

We know which option we would prefer, but judging by the existence of price-gouging laws in so many states, we must be in the minority.

(Randal Rucker is a professor in the Department of Agricultural Economics and Economics at Montana State University and a principal in the Northwest Economic Policy Seminar. Walter Thurman is a William Neal Reynolds professor in the Department of Agricultural and Resource Economics at N.C. State University and a senior fellow at the Property and Environment Research Center.) | Counterproductive price-gouging laws