Anti-Gouging Laws Can Kill

Much has been made in the media about the Surgeon General’s recent Twitter exhortation, “Seriously people – STOP BUYING MASKS! They are NOT effective in preventing general [sic] public from catching Coronavirus.”

But what is usually left out is the rest of his tweet, “…but if healthcare providers can’t get them to care for sick patients, it puts them and our communities at risk!”

I am not a medical doctor, so I have no particular expertise in evaluating whether masks help prevent infection in the general public. Although I do find it interesting that masks are recommended for those *caring* for infected people, so masks apparently are effective at preventing infection, if used properly (and a big deal is made about how difficult it is to properly “fit” the mask over one’s face — just how hard can that be??).

But I am an economist, so I find the under-reported second part of his tweet very interesting and revealing. Is the Surgeon General advising people not to buy masks because they are not helpful in preventing infection, or is he advising people not to buy masks because he is worried about a shortage, and wants to ensure that the existing supply of masks be available for those who most crucially need it: the doctors and nurses and loved ones who are caring for sick patients?

I wish the Surgeon General had studied economics. The Law of Supply and Demand — the most fundamental principle of economics — tells us that shortages cannot exist when prices are allowed to adjust to changes in supply and demand. Or, to put it another way, shortages *only* arise when the price mechanism is impeded, whether by law or by custom.

In the United States, and around the world, both law and custom prevent market prices from adjusting when such adjustment is most urgently needed: when there is a supply disruption and/or a spike in demand for that product. That is happening right now, when it comes to “N95” masks, the type that filter out 95% of particles and are deemed most effective in preventing the spread of coronavirus.

I actually bought a box of 10 of these masks last year for a trip to Mumbai, India, where I used them — quite successfully — to protect me from the highly polluted air in that city. It cost about $15. Yet today at all of the drug and hardware stores around town that used to sell these masks, I see signs on their front doors that say, “No masks available.”

Demand has spiked for these masks. Whether this spike in demand is based on sound medical opinion or not, it is a fact. If prices were allowed to adjust, they would rise. This would have two effects. First, it would reduce the quantity purchased. Those who were not willing to pay the higher price for the masks would not get them, while those who urgently needed the masks — and could pay for them (think: hospitals!) — would find them readily available.

Economists often describe this salutary “rationing” effect of higher prices. It means that those who most urgently want and need the masks, and can pay for them, will get them, while those who value them less, will not get the masks.

However, the higher prices have an even greater salutary effect on the supply side. It is greater and longer-term, because the higher prices induce an increase in the *production* of masks. Higher prices signal higher profits to be made in making the masks. This means that factories can afford to bring on extra shifts, hire more trucks, pay more for scarce supplies — do all that it takes to make more masks to meet the extra demand.

The result — if market prices are allowed to adjust — is that while the quantities demanded are temporarily curtailed to meet the available supply — the quantities supplied begin to radically increase. The result is that more masks become available, and prices eventually fall. Eventually, they will fall to nearly the “typical” or “normal” level that preceded the outbreak of coronavirus, but with shelves full of masks. No shortages!

But instead of finding (temporarily expensive) masks available for sale, we are confronted by “No masks available” signs everywhere we look.

We have caused this potentially deadly shortage of masks with our antipathy to “price gouging.” That antipathy is deeply embedded in our culture. We decry “price gougers” at sporting events, or who sell drugs at “unconscionably high” prices or who simply charge prices that we do not like!

This cultural antipathy to high prices has found its way into laws. In the past 25 years, some 34 states have passed laws that prohibit “price gouging.” It is defined in various ways, some more objectively than others. In California, it is illegal to raise the price of a product during an emergency by more than 10% from what it was before the emergency. In Florida, the law simply says that it is illegal to charge an “unconscionably high” price for an “essential commodity” during an “emergency.” Good luck defining those terms.

The result is that the CEOs of businesses, such as CVS Drug or TrueValue Hardware, perhaps just to avoid the wrath of their customers who hate price gouging, or to comply with the anti-gouging laws, whether vaguely worded or not, simply choose not to raise prices of goods during an emergency.

Instead, they simply let their supplies run out. They cannot increase their orders because they cannot pay more for the goods to their wholesalers who, in turn, cannot pay more to the manufacturer who, in turn, is unable to call in the extra shifts, pay the overtime, rush in the urgently needed supplies, etc., to make more of the masks…

Or the generators, or the gasoline…

In 2006, in a notorious case, a man who wanted to bring in generators from out of state during Hurricane Katrina was jailed, and his generators confiscated, while the governor of Mississippi, Sonny Perdue, proclaimed that he would step up enforcement action against price gougers.

In Florida, gas station owners preferred to let their gasoline run out rather than charge more money for gasoline, which would have incentivized gasoline wholesalers (at greater cost to themselves) to ship in urgently needed gas from other parts of the country that were not devastated by the hurricane.

Generators, gasoline and (probably) face masks are urgently needed during disasters and emergencies, such as hurricanes or outbreaks of new viruses.

And the only way we can ensure their ready supply is to allow prices to rise.

It is time that Americans — and everyone around the world — embrace price gouging and recognize it as the vital and life-saving market mechanism that ensures that supplies reach their most urgent, life-saving uses, and that more of these supplies are manufactured and distributed.

A first step is to repeal the silly and non-objective “price gouging” laws on the books of 34 states. A second, more fundamental step is to understand the economics of supply and demand. It is high time that all of us abandon the term “price gouging” and call it what it is: supply and demand. And recognize the life-saving value of unimpeded market prices, whether those prices are “high” or not.

I have just one of those N95 masks left and see lots of “No masks available” signs at the stores that used to sell them around me. I hope I don’t get coronavirus.

Raymond C. Niles

Raymond Niles - headshot

Raymond C. Niles is a Senior Fellow the American Institute for Economic Research and Assistant Professor of Economics & Management at DePauw University. He holds a PhD in Economics from George Mason University and an MBA in Finance & Economics from the Leonard N. Stern School of Business at New York University. Prior to embarking on his academic career, Niles worked for more than 15 years on Wall Street as a senior equity research analyst at Citigroup, Schroders, and Goldman Sachs, and as managing partner of a hedge fund investing in energy securities. Niles has published a book chapter and numerous articles in scholarly and popular publications.

Republished with permission from the American Institute for Economic Research.

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