Research shows that DFL’s ‘price gouging’ law would make things worse
Last week I wrote about a DFL proposal to fight the shortage of baby formula in Minnesota with a law banning ‘price gouging’. This proposal stems from the idea that such shortages, as well as rising prices, are the result of ‘corporate greed,’ which has risen to new heights recently for some unexplained reason.
This is absurd. In fact, the price of baby formula has increased by 2.7% in nine months while prices generally have risen by 5.7%: not only have formula prices not been ‘gouged,’ they haven’t even kept up with inflation. The issue facing desperate parents is not that formula is too expensive, but that there isn’t enough of it. The DFL’s proposed does noting whatsoever to tackle that real problem. In fact, it would make it worse.
Imagine an ‘Abnormal market disruption’ like a pandemic which prompted a surge in demand for an ‘Essential consumer good or service’ like toilet paper — not so hard. The first people to get to the store buy all the toilet paper and there is none for the people who come later. How do we ensure that the people who come first don’t hoard and that the people who come later don’t find empty shelves?
One way is to ration, limiting the amount of toilet paper each person can buy. Another way is to increase prices so that the people who come first buy less. Which approach is better?
Well, the problem is a surge in demand, so what we want is a surge in supply to meet it. The second approach — higher prices — will send a signal to producers to produce more toilet paper. The first approach — limiting what each purchaser can buy — won’t. The shortage will persist. All a ‘price gouging’ law would do is make the shortage last longer.
Research finds that that is the case. A recent study by economists Rik Chakraborti and Gavin Roberts found that during Covid-19, the residents of the 34 states with “price gouging” laws on the books, having had the experience of shortages in past emergencies, engaged in hoarding, which worsened the shortages.
When I criticized the DFL’s proposed anti-price gouging law recently I was accused of being “pro price gouging”. Well, that is better than being pro-shortage.