We Can’t Stop the Twisters, But We Can Stop Price Gouging
Natural forces are blind to what they destroy. People aren’t. In the past month, tornadoes and flooding in the South and Midwest left behind crippled lives, destroyed homes, and eviscerated infrastructure.
Now as the victims of the tornadoes try to rebuild, they are left vulnerable to another foe–people who use the disaster for economic gain by price-gouging.
Price-gouging occurs when merchants artificially raise the price of consumer goods that are in an emergency or natural disaster. For example, it’s price-gouging, when after Hurricane Katrina, people were forced to pay $7 for a bottle of water.
Thankfully, there are legal protections against price-gouging in many states, including those that recently declared a state of emergency: Alabama, Arkansas, Kentucky, Mississippi, Missouri, North Carolina, Oklahoma, Tennessee, and Virginia. In each of these states, the price-gouging statutes allows the attorney’s general to investigate and prosecute instances of price-gouging once a state of emergency is declared.
The definition of price-gouging is not settled in some jurisdictions. In Virginia and Tennessee, for example, price-gouging is an “unconscionable” or “unreasonable” price-hike. The exact definition of those terms is then left to the discretion of the AG in the first instance, and then to a judge or jury if a case is tried. In other words, it’s open to interpretation and litigation.
Other states have taken an approach that more clearly delineates what is or isn’t price-gouging. Arkansas follows a more strict approach, prohibiting price increases above 10% for storm recovery products (i.e. water, batteries, food, fuel, and construction materials). Meanwhile, Alabama allows for higher price-hikes than Arkansas. It only prohibits raising prices above 25% of the average price for the previous 30 days.
The consequences in prosecuting a price-gouging crime are also different from state to state. So the same price-hike in one state could carry with it a penalty of $10,000, but in a different state it would only be $1,000 per violation.
How does any of this help the victims of natural disaster? In theory, the threat of these consequences will deter potential price-gougers from profiting excessively from the misfortune of others. This is why Attorney Generals in the affected states have made public statements warning price-gougers and asking citizens to report incidents of price-gouging.
It may not be much of a comfort to people who are currently the victims of price-gouging that state Attorney’s General try to prevent gouging. But there can be additional ways for victims to get help. States, like New York, are considering creating a private cause of action in these cases, allowing victims to sue to stop the price-gouging practice and to collect damages. And in other states, like Vermont, there is a right of action under consumer fraud statutes.
The availability of recovery all depends on the laws of your state. But in all of the tornado affected areas, there are means to deter and punish price-gouging. If you suspect that you are a victim of price-gouging, you can check out your state’s attorney general’s office, or consult a knowledgeable local attorney.
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Comments
You say: “How does any of this help the victims of natural disaster? In theory, the threat of these consequences will deter potential price-gougers from profiting excessively from the misfortune of others.”
Wow. You have no idea whatsoever if any of these laws do what thay are intended to do, nor do you have any idea if they make things worse. You just go on faith of the good intentions of the law.
If there is a shortage of a product after a disaster the only real way to measure that is a price signal. If prices don’t go up enough, not enough supplies will come, so you won’t have enough supplies. But, hey, at least “consumers” aren’t being “gouged.”
@Dan Garfield: You say: “How does any of this help the victims of natural disaster? In theory, the threat of these consequences will deter potential price-gougers from profiting excessively from the misfortune of others.”
Wow. You have no idea whatsoever if any of these laws do what thay are intended to do, nor do you have any idea if they make things worse. You just go on faith of the good intentions of the law.
If there is a shortage of a product after a disaster the only real way to measure that is a price signal. If prices don’t go up enough, not enough supplies will come, so you won’t have enough supplies. But, hey, at least “consumers” aren’t being “gouged.”
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Thanks for your comment! This post has generated some controversy, not just at LegalMatch’s blog, but also around the Internet, and has led to some interesting conversations with other attorneys, economists, and public policy experts.
You bring up a valid economic point, which I’ll get to in a bit. But before I do, I want to clarify what looks like two possible misreadings on your part. First, my initial post addressed only the theory underlying price-gouging statutes, not their effects in practice (notice that I wrote, “In theory,…”). I haven’t at all meant to take their economic or other public policy effects for granted.
Second, writing as an attorney, I didn’t intend to address whether price-gouging statutes produce economically efficient outcomes, which is only one part of crafting public policies. Instead, I looked at what consumer-protection causes of action might arise in the wake of natural disasters. I also didn’t make a normative statement about the price-gouging statutes, but rather only indicated that they do exist. In other words, I didn’t address whether they’re good or bad from a public policy perspective.
Getting to your economic point–which I think is that distorting supply/demand dynamics will worsen shortages of goods in disaster areas–you really might be right. Basic economic theory does support what you suggest: the correct price is whatever clears the market when supply and demand are in equilibrium. Distortions in that price produce either shortages or surpluses, neither of which are economically efficient. But at a slightly higher level of analysis, a potential hang-up in what you suggest is the assumption that the disaster-gouged prices aren’t themselves a distortion akin to monopoly or oligopoly conditions. Put another way, through disrupted supply chains, disasters turn sellers otherwise exposed to perfect competition into mono/oligopolists, or so the theory goes. Going back to basic economic theory, we all know that mono/oligopolies are inefficient, resulting in prices above and produced-quantities below the supply/demand equilibrium. So, if disasters transform otherwise perfect competition into mono/oligopoly conditions, then what we end up with is a distorted market, and the price signal won’t function as you suggest. But whether that’s actually the case is something I’ll leave to the economics and econometrics experts, since it’s just not my area of expertise.
Having said this, assuming the disaster doesn’t itself produce market distortions, an efficient price is still probably achievable. Many price-gouging statutes use a soft standard, prohibiting “unconscionable” increases in price, rather than specific bright-line percentage increases. Sellers absolutely can raise their prices, as a result, and only violate the law if they do so “unconscionably.” Whether an increase in price is “unconscionable” would be an issue the lawyers would debate in a prosecution under such a statute, and that the jury would have to decide. If a defendant seller were able to show that his/her increase in price were economically necessary to clear the market–in other words, for him/her to adequately supply demand–then I can’t imagine that a jury would find this to be “unconscionable.” Though, if policymakers wanted to put sellers’ minds at ease, they should probably specify economic necessity as a defense, if they haven’t already.
So long as we’re discussing price-gouging protections from a public policy perspective, economic analysis is only one part of the picture, as I mentioned before. It might be worth it, for example, to trade some economic efficiency for social stability. Global food prices spiked in 2007-2008, producing widespread rioting. They spiked again this year, which arguably helped ignite the Egyptian and other revolutions in the Middle East. Policymakers probably also have social stability in mind in implementing price-gouging protections in disaster zones, since channelling disputes into our courts is one way of keeping them out of our streets.
In any event, thanks so much for reading and sharing your thoughts. I’ll be continuing to discuss this with economist Michael Giberson at Texas Tech University, which hopefully will generate some more blog posts on the topic. Stay tuned!