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48
 
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Regulation
 
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Spi 2011
ConsumeR PRoteCtion
T
he summer o 2008 challenged gasoline retailers.Crude oil prices had climbed to unprecedentedheights over the rst hal o the year, peaking inJuly beore tumbling sharply aterward. Partly inresponse to the high prices, crude oil and petroleum prod-uct inventories were at unusually low levels as the hurricaneseason began. In late August, Hurricane Gustav tore throughthe middle o the oil-producing region in the Gul o Mexico.More than 95 percent o oshore oil and gas platorms wereshut down beore the storm arrived. Less than two weeks aterGustav, Hurricane Ike threatened another direct hit to the Gul region’s energy production acilities.Weigle’s, a chain o convenience stores in the Knoxville, TNarea, was having a hard time nding gasoline supplies aterGustav. According to contemporary news reports, the approacho Ike turned the situation rom dicult to nearly impossible.Weigle’s buyers typically bought wholesale gasoline in spot mar-kets rather than through long-term contracts. The strategy paido in slightly lower costs most o the time, helping the storeskeep their retail gasoline prices low. The catch is, when wholesalesupplies get tight, spot prices can really jump.On Thursday, two days beore Ike made landall on the Texascoast, owner Bill Weigle said his wholesale costs increased by 85cents per gallon — and that was when he could nd gasoline tobuy. The storage tanks that usually served Knoxville were dry andWeigle’s had to have whatever gasoline they could nd trucked inrom other cities. Some o his stores had run out o gasoline, too.He told reporters that “his stores may have to increase prices atthe pump by $0.85 to $1 by Friday.” The next morning, Weigle’sraised prices or regular-grade gasoline at several stores by about80 cents, rom an average near $3.70 per gallon to about $4.50per gallon.Pilot Travel Centers, a Knoxville-based national chain, andother area gasoline retailers ound themselves in the same gen-eral condition. More than one area Pilot station sold gasoline oras much as $4.99 per gallon the weekend that Ike came ashore.Gasoline prices spiked almost everywhere in the country becauseo the two storms, but the spike was sharpest in Knoxville. Dur-ing Hurricane Ike’s weekend, the Knoxville area had the highestgasoline prices in the United States.On the Friday that Weigle’s and other retailers were raisingretail prices, Tennessee’s attorney general, Bob Cooper, issued a statement reminding Tennesseans that the state remained undera declared state o emergency. Cooper warned consumers to beon the lookout or price gouging and invited them to reportsuspected incidents o it. Even beore the statement, price com-plaints were being received by the state. Many more calls came inover the next several days. Overall, Tennessee received more that4,000 price complaints during the emergency period.The Tennessee attorney general’s oce and the state’s Depart-ment o Commerce and Insurance examined the complaints andlaunched investigations into the prices charged by 17 gasolineretailers in the state. Seven months ater Hurricane Ike struckthe Gul Coast, the state announced that 16 o the 17 companies
Michael Giberson
is an instructor with the Center or Energy Com-merce in the Rawls College o Business at Texas Tech University.
The Problem withPrice Gouging Laws
I ial icig dig a gcy hical?
By miChael giBeRson
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Texas Tech University
 
Spi 2011
 
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Regulation
 
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had entered into settlements. The companies denied wrongdoingbut agreed to pay civil penalties and oer reunds. The attorney general’s oce led suit against the one company that reused tosettle, Weigle’s. A year later, Weigle’s also settled, agreeing to make$57,000 in payments to the state and oering consumer reunds.As had many o the parties that settled a year sooner, Weigle’sdenied wrongdoing and said it settled only to avoid the costs andrisks inherent in protracted litigation with the state.Gasoline retailers are not the only targets o price gouginglaws. Prices charged on everything rom hotel rooms, to electricgenerators, to bottled water have been occasions or legal action.Duke University economist Michael Munger reported that aterHurricane Fran hit central North Carolina in 1996, our men sell-ing ice were arrested near Raleigh or charging a price much higherthan the $1.75 per bag price that prevailed in the area beore thestorm. Munger said some consumers were angered by the price, butalmost no one reused to pay. Ater all, without power and unsurewhen the power would return, ice was much more valuable to theconsumers than it had been just beore the storm.The price gouging laws o Tennessee and North Carolina, andthose o the 30 or so other states with similar laws on the books,are something o a puzzle or economists. Economists usually point to public goods or special interests as the mobilizing orcebehind regulations. Price controls, including price gouging laws,almost certainly reduce overall economic welare. And while pricecontrols sometimes create the concentrated benets sought by interest groups, the benets and costs o price gouging laws arewidely dispersed and uncertain in impact — hardly the kind o prize lobbyists usually pursue.Instead, price gouging laws appear more akin to laws banningthe sale o horse meat or human consumption, “Blue laws” thatprevent the sale o certain items on Sunday, or laws that once pro-hibited interracial marriage. The laws put the orce o governmentbehind eorts to prevent people rom entering into agreements ortransactions that lawmakers nd objectionable. One more puzzle:unlike Blue laws and interracial marriage bans, laws against pricegouging are not ading away as society becomes more accepting o personal dierences. Instead, price gouging laws emerged relatively recently, are spreading geographically, have become more expansivein scope, and are becoming more requently invoked.Economists and policy analysts opposed to price gouging lawshave relied on the simple logic o price controls: i you cap priceincreases during an emergency, you discourage conservation o needed goods at exactly the time they are in high demand. Simul-taneously, price caps discourage extraordinary supply eorts thatwould help bring goods in high demand into the aected area.In a classic case o unintended consequences, the law harms thevery people whom lawmakers intend to help. The logic o supply and demand, so clear to economists, has had little eect on pricegouging policies.
IlluStratIon by Morgan ballard 
 
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Regulation
 
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Spi 2011
C o n s u m e r p r o t e C t I o n
Price Gouging Laws
In popular usage, consumers complain about “price gouging”just about anytime they do not like a price. A casual scan o let-ters to the editor and online columnists will reveal price goug-ing claims or everything rom 3-D movie tickets, to resh-cutfowers, to cables or high-denition televisions. Recently, whengasoline prices in Alaska trended up over several months to 40or 50 cents per gallon above the national average, state legisla-tors charged that reners were price gouging.More typically, however, “price gouging” claims involve threeactors:a price deemed unairly high,
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an emergency or dicult situation, and
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a product or service useul in responding to the emergency.
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Price gouging laws can be more restrictive, sometimes deningone or more o the three actors more clearly:a price increase in excess o some threshold,
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a declared state o emergency, and
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a specic set o necessary or useul products or services.
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In Caliornia, or example, the price gouging law prohibitscharging a price more than 10 percent higher than the pricecharged prior to a declared state o emergency or consumer ooditems, goods and services used or emergency cleanup, medicalsupplies, home heating oil and gasoline, and other goods andservices in particular demand in post-emergency situations.Many state laws permit retailers to pass along higher wholesalecosts while price gouging laws are in eect, so long as the retailer’smargin does not increase.The irst state law explicitly directed at price gouging wasenacted in New York in 1979, in response to increases in homeheating oil prices during the winter o 1978–1979. New York’s lawinitially applied to retailers oering “consumer goods and servicesvital and necessary or the health, saety, and welare o consum-ers” at an “unconscionably excessive price,” and applied during anemergency declared by the governor. Just three states passed similarlaws in the 1980s: Hawaii in 1983, and Connecticut and Mississippiin 1986. Then, 11 more states added anti-price gouging laws orregulations in the 1990s and 16 states ollowed in the 2000s.When price gouging laws are revised, the tendency is or thescope o the law to be broadened, the penalties to become morepunitive, and the conditions under which the laws are applied tobecome less restrictive. The New York law was amended in 1995to include repairs made on an emergency basis and to increasethe maximum ne rom $5,000 to $10,000. In 1998, New Yorkamended the law again to include prices on wholesale and inter-mediate goods. Mississippi amended its law in 1994 to classiy some violations o the law as elonies and clariy that the emer-gency need not happen within the state or the law to be invoked.Connecticut amended its price gouging statues in October 2005to include “any period in which an imminent abnormal marketdisruption is reasonably anticipated,” increased the maximumne, and specied that the term “seller” included “a supplier,wholesaler, distributor, or retailer.”Changes that narrow the scope o price gouging laws are lesscommon, but they do occur. A year ater Utah passed its pricegouging law, it was amended to speciy that the emergency mustoccur in Utah or the law to be invoked. In 2010, Connecticutamended its law to provide sae harbor rom price gouging pros-ecution to energy retailers whose margins do not increase. Also in2010, Georgia amended its law to require the governor to speciy in the declaration o emergency just which goods and services willbe subjected to price gouging controls.
The Ethics of Price Gouging
Many people eel price gouging is morally wrong. The remarkso newspaper columnists and state legislators provide ready evi-dence on this topic. Survey research by Daniel Kahneman, JackKnetsch, and Richard Thaler, published in the
American Economic Review
, urther establishes this point: most respondents oundprice increases during dicult times to be unair, except in casesin which retailers were only passing along cost increases.More recent research suggests that these unairness judg-ments are driven primarily by emotional responses to the priceincreases. Careul examination o the ethics o price gougingraises questions or these emotion-driven judgments. The ethicalcase or limiting price gouging is weaker than it may appear.Harvard political philosophy proessor Michael Sandel openedhis 2009 book
Justice: What’s the Right Thing to Do?
with the debateover price gouging that ollowed in the wake o Hurricane Char-ley. The storm hit Florida in 2004, killing 22 people and causing$11 billion in damages. Sandel said arguments or and againstprice gouging laws revolved around three ideas: maximizingwelare, respecting reedom, and promoting virtue.Opponents o price gouging laws ocus on welare and ree-dom, Sandel said, but neglect considerations o virtue. Sandelcited a September 2004 op-ed by Thomas Sowell to illustrate thewelare point. In it, Sowell said the problem with price gouginglaws was that they keep goods and services rom being used wherethey are most needed; people will be better o without price caps.An August 2004 op-ed by columnist Je Jacoby provided a quotein support o the reedom argument: “It isn’t gouging to chargewhat the market will bear. It isn’t greedy or brazen. It’s how goodsand services get allocated in a ree society.”Both Sowell and Jacoby noted the emotion behind pricegouging laws, but dismissed the relevance o emotion or decid-ing public policy. Sandel suggested that emotion plays a moresignicant role:
Much public support or price-gouging laws comes rom some-thing more visceral than welare or reedom. People are outragedat “vultures” who prey on the desperation o others and want thempunished — not rewarded with windall prots. … [This] outrage ismore than mindless anger. It gestures at a moral argument worthtaking seriously. Outrage is the special kind o anger you eel when
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