Anti-price gouging laws would do more harm than good for Minnesotans

When disasters strike, they are usually accompanied by shortages of various necessities. This essentially necessitates that the prices for those goods rise — in most cases higher than normal — which is also known as price gouging.

Minnesota lawmakers, much like other politicians, think it is unfair for sellers to raise prices in a crisis. So they have introduced a bill that would prohibit such price increases.

What’s in the bill?

Senate Bill SF6 and its House companion HF6 essentially state that

During an abnormal market disruption, a person is prohibited from selling or offering to sell an essential consumer good or service for an amount that represents an unconscionably excessive price.

An abnormal market disruption, in this case, would be

a change in the market resulting from a natural or man-made disaster, a national or local emergency, a public health emergency, or an event resulting in a declaration of a state of emergency by the governor or president. Abnormal market disruption also means an increase in the price for an essential consumer good or service that exceeds 30 percent within a seven-day period.

What is considered an essential consumer good? The bill doesn’t say. What is considered an unconscionably excessive price? There’s no number for that, either.

But according to the bill, a price is unconscionably excessive if it is significantly higher than what the good normally sells for in normal times or when compared to other similar goods. A price is also unconscionable if it does not directly result from rising costs (on the seller’s part) and does not increase the seller’s profit.

Any entity found guilty of price gouging will be subject to a penalty of $10,000 per sale or transaction.

Anti-price gouging laws don’t help

Price gouging is, however, a necessary reaction to shortages. It prevents people from hoarding goods and services and instead allocates them to those who value them the most. High prices also alert producers of a profit opportunity, which incentivizes increased production, thereby increasing supply which then brings prices down in the end.

Without prices rising, market participants will usually hoard goods and services, worsening the shortage. Producers will also not react to the shortage because they are missing the signal that normally alerts them of the need to do so. This usually elongates the shortage.

Evidence during the pandemic in fact showed that states with anti-price gouging laws experienced worse shortages because residents were hoarding goods.

Anti-price gouging laws do more harm than good

Minnesota lawmakers should not pass the currently proposed anti-price gouging bills. If passed, the law won’t help Minnesotans and would only make shortages worse during a crisis.