Last week, New Jersey charged eight businesses with gouging customers with exorbitant prices after Hurricane Sandy — seven gas stations and a hotel. What struck me as curious was the relatively low increases that were the basis for the change, including an eleven percent increase.
There has always been some academic debate over the concept of gouging which rests uneasily with economic principles of scarcity of demand. Some businesses privately argue that they should be able to raise their prices to reflect scarcity of products, which should rise with demand. Under the scarcity principle, the price for a good rises until an equilibrium is reached between supply and demand.
Gouging laws, however, treat such increases as abusive treatment of desperate consumers. Thus, if you sell batteries and happen to have wisely stored an inventory of such items before a storm, you cannot reap the expected profits by increasing the price of the product.
In one of the cases, an owner of a Howard Johnson Express was charged with gouging for simply raising its prices from $90 to $119 — just shy of $30 dollars or 32 percent.
The prosecutors insisted that such small increases were still gouging absent a showing that the defendants faced added costs. What is interesting is one case involved just an 11 percent increase — or one percent above the permitted increase under state law.
The law does not keep most businesses from increasing their prices, just those businesses deemed essential for living. The law covers “goods or services which are consumed or used as a direct result of an emergency or which are consumed or used to preserve, protect, or sustain life, health, safety, or economic well‑being of persons or their property.” The freeze on pricing for these business extends for “45 days from the triggering event.” New Jersey uses a 10 percent benchmark for increases.
Thirty-four states and the District of Columbia have anti-price gouging laws
The defendants face fines of up to $10,000 for their first offenses and $10,000 for subsequent offenses.
I understand the purpose of these laws to protect consumers, but I wonder if the ten percent line is a bit low as a threshold. What do you think?
Here is the full law:
§ 75‑38. Prohibit excessive pricing during states of disaster, states of emergency, or abnormal market disruptions.
(a) Upon a triggering event, it is prohibited and shall be a violation of G.S. 75‑1.1 for any person to sell or rent or offer to sell or rent any goods or services which are consumed or used as a direct result of an emergency or which are consumed or used to preserve, protect, or sustain life, health, safety, or economic well‑being of persons or their property with the knowledge and intent to charge a price that is unreasonably excessive under the circumstances. This prohibition shall apply to all parties in the chain of distribution, including, but not limited to, a manufacturer, supplier, wholesaler, distributor, or retail seller of goods or services. This prohibition shall apply in the area where the state of disaster or emergency has been declared or the abnormal market disruption has been found.
In determining whether a price is unreasonably excessive, it shall be considered whether:
(1) The price charged by the seller is attributable to additional costs imposed by the seller’s supplier or other costs of providing the good or service during the triggering event.
(2) The price charged by the seller exceeds the seller’s average price in the preceding 60 days before the triggering event. If the seller did not sell or rent or offer to sell or rent the goods or service in question prior to the time of the triggering event, the price at which the goods or service was generally available in the trade area shall be used as a factor in determining if the seller is charging an unreasonably excessive price.
(3) The price charged by the seller is attributable to fluctuations in applicable commodity markets; fluctuations in applicable regional, national, or international market trends; or to reasonable expenses and charges for attendant business risk incurred in procuring or selling the goods or services.
(b) In the event the Attorney General investigates a complaint for a violation of this section and determines that the seller has not violated the provisions of this section and if the seller so requests, the Attorney General shall promptly issue a signed statement indicating that the Attorney General has not found a violation of this section.
(c) For the purposes of this section, the end of a triggering event is the earlier of 45 days after the triggering event occurs or the expiration or termination of the triggering event unless the prohibition is specifically extended by the Governor.
(d) A “triggering event” means the declaration of a state of emergency pursuant to G.S. 166A‑8 or Article 36A of Chapter 14 of the General Statutes, the proclamation of a state of disaster pursuant to G.S. 166A‑6, or a finding of abnormal market disruption pursuant to G.S. 75‑38(e).
(e) An “abnormal market disruption” means a significant disruption, whether actual or imminent, to the production, distribution, or sale of goods and services in North Carolina, which are consumed or used as a direct result of an emergency or used to preserve, protect, or sustain life, health, safety, or economic well‑being of a person or his or her property. A significant disruption may result from a natural disaster, weather, acts of nature, strike, power or energy failures or shortages, civil disorder, war, terrorist attack, national or local emergency, or other extraordinary adverse circumstances. A significant market disruption can be found only if a declaration of a state of emergency, state of disaster, or similar declaration is made by the President of the United States or an issuance of Code Red/Severe Risk of Attack in the Homeland Security Advisory System is made by the Department of Homeland Security, whether or not such declaration or issuance applies to North Carolina.
(f) The existence of an abnormal market disruption shall be found and declared by the Governor pursuant to the definition in subsection (e) of this section. The duration of an abnormal market disruption shall be 45 days from the triggering event, but may be renewed by the Governor if the Governor finds and declares the disruption continues to affect the economic well‑being of North Carolinians beyond the initial 45‑day period. (2003‑412, s. 1; 2006‑245, s. 1; 2006‑259, s. 41.)