Whenever a hurricane or natural disaster hits, accusations of local businesses “price gouging” follow.
It happened after Hurricane Helene, with people online moaning about certain gas stations apparently charging $10 per gallon. North Carolina, South Carolina, and Georgia have all reported complaints from the public over businesses’ pricing for items like fuel, groceries, hotel rooms, and water too.
And then we saw complaints about flight and hotel prices in Florida ahead of Hurricane Milton.
A tweet went viral supposedly showing a United Airlines economy flight from Tampa to St. Louis costing $2,150, far higher than rates for Southwest or American. Bizarrely, the listed flight itinerary mapped out by someone called “iowaradioguy” entailed two stops. The airline (United) pointed out that this was probably a funky website glitch given the origin Tampa airport was actually due to be closed at that time. United said that they had decided to cap flight prices from affected locations below $500 per flight.
Even though that viral tweet was likely misinformation, it didn’t stop politicians from jumping on the anti-price-gouging bandwagon. President Joe Biden “called on private companies to not engage in price gouging,” slamming it as “completely unacceptable.” Vice President Kamala Harris went further, threatening those companies increasing prices for “gasoline, hotels, or flights” with “consequences” [my emphasis] should the federal government deem these pricing decisions unfair.
I won’t rehearse again here my full argument for allowing free market pricing, even if that means big price hikes in times of crisis (read this anti-price-gouging excerpt from The War on Prices). I’ll just remind readers that most economists oppose state anti-price-gouging laws or federal government efforts that cap prices in emergencies.
That’s because we recognize that prices are signals that reflect the relative scarcities of products rather than something the business can set on a whim (remember, firms are constrained in what they can charge by both their competitors and customers’ willingness to pay). As such, we expect that if anti-price gouging laws constrain prices to below market rates in light of a demand surge or supply-shock, we will see shortages and black markets. On the demand side, artificially low prices encourage excess consumption. On the supply-side, price caps reduce the incentive for entrepreneurs and encourage hoarding. The combination can be deadly during emergencies if people can’t gain access to the resources they need.
Florida Gas and Air (Travel)
Florida has an anti-price gouging statute on the books. After an emergency is declared, it is unlawful to sell or rent “essential” goods or services for “unconscionable” prices in Florida - i.e. those that “grossly exceed” the average price in the 30 days prior, unless you can prove that your costs or market trends justify a price hike. Those goods deemed essential include “food, water, ice, chemicals, petroleum products, and lumber necessary for consumption or use as a direct result of the emergency.”
Florida appears serious about applying its law. There are numerous press releases from the state’s Attorney General surrounding price gouging stats, as well as a whole price gouging section in Florida’s 2024 Hurricane Preparedness Guide, which states that the Office of the Attorney General “investigates every allegation of price gouging.”
During the COVID-19 pandemic, another emergency, Florida:
received approximately 3,350 consumer contacts about the price of essential goods;
made more than 4,500 referrals and contacts to merchants about allegations of price gouging, refunds and scams;
secured more than $240,000 in refunds related to travel, leisure and product purchases;
issued 65 subpoenas to further price gouging investigations; and
worked with online platforms to deactivate more than 185 posts offering items for “outrageous prices.”
Since Hurricane Helene appeared, the Florida AG has received hundreds of price-gouging complaints through their hotline and is investigating 160 of them. During Hurricane Dorian in 2019, the Florida AG received more than 2,400 reports of price gouging.
Perhaps unsurprisingly, then, Florida’s gas stations took the threat of this law seriously prior to Hurricane Milton. Prices per gallon in the Tampa Bay area stayed low this week even as demand for gas soared, with families seeking to get on the highway to flee the hurricane’s path.
Holding prices at around $3 per gallon despite this demand surge wasn’t without consequence, of course. The effective real price to consumers of gas still went up as they had to spend lots of time in long lines at gas stations.
What’s more, as basic economic theory would suggest, firms not increasing prices to reflect the new relative scarcity led to many stations running dry more often than usual - i.e. there was a gas shortage. Below, for example, is a screenshot via Gas Buddy for some gas stations in the Tampa area. At the time I looked (the morning before Milton hit), 4 of the first 10 gas stations listed were out of gas.
Although we’d perhaps expect some stations to run out even with purely flexible pricing given the sheer volume of unexpected demand, limited storage capacity, and companies attempting to protect their reputation for price competitiveness, on the margin the restrained price would have encouraged many to pay for what they wanted (extra spare for their generator, say) rather than what they strictly needed to get to a safe zone. That means less left over for those who perhaps can’t afford hotels and really need gas and are willing to pay for it.
While gas stations no doubt implemented contingencies to try to get new supplies to serve this higher demand (and there’s only so much major suppliers can do when a sudden storm hits), a higher market price would also have encouraged some entrepreneurial types from elsewhere to try to arbitrage by bringing in gas supplies from other areas.
Florida’s statute doesn’t cover flight prices. So, perhaps unsurprisingly, given so many people wanted to get away from the hurricane, flight prices did increase compared to “normal” levels - although not to the extent that “iowaradioguy” seemed to suggest. Maybe those prices would have gone up higher still, but the federal government through the Department of Transportation admitted putting pressure on airlines not to increase them too much.
Are these flight price rises a “bad” thing compared with the price stability seen at gas stations? Supporters of anti-price gouging laws seem to assume so.
Isabella Weber - doyen of modern price control advocacy - says “price gouging is rationing by price.” When a crisis hits suddenly, as Milton did, her argument is that the supply capacity for most goods or services is fixed. “Supply of air tickets does not go up beyond what an airport can handle. Supply is fixed at capacity,” she tweeted. In other words, in emergencies we must decide how to allocate a fixed number of goods that are necessarily in short supply. Rationing by price is seen by her as just implicitly less fair than allocating the goods on a first-come, first-served basis, or via more explicit rationing. Hence, her support for anti-price-gouging laws.
The problem with this argument is two-fold. First, even if the supply of any good like gas or flights is completely fixed in the short-term, there are still advantages to rationing by price. The time spent in long lines is socially wasteful, and actually uses up more fuel. Capped prices also encourage the marginal consumer to buy more than they strictly need to get out of the hurricane zone. Although rationing by price doesn’t always guarantee that resources go to those who “need” them most, it does put gas to its highest-valued uses in money terms. Someone just using gas to drive around locally may wait if prices are higher. People might carpool. Or a family heading out might buy just enough to get to the next city where they will stop buy gas again. Yes, the higher price means more expensive gas, which isn’t great for the poorest. But if there are willing buyers, it reflects the economic realities of the crisis and helps avoid some of the shortage. And given that the poorest are likely to live in lower quality housing and are less likely to be able to afford hotels or flights, having access to gas - even at two to three times its normal prices - is probably better for them than gas stations running completely dry.
The bigger, second fault in the argument, however, is the assumption that supply really is fixed and that a higher price will not increase it. That is clearly not the case. As mentioned, even aside from the established retailers, a high legal market gas price would encourage entrepreneurial folk to try to find ways to get extra gas to Florida or out of storage. And a 2006 Federal Trade Commission investigation into alleged price gouging after Hurricane Katrina found that one national retailer “told staff that it closed its stations in Florida (which normally bought from a refiner at prices tied to a Platts spot market price) because the firm could not afford to re-supply the stations without either selling gasoline at a loss or risking that it would violate the state’s anti-gouging laws.” Anti-price gouging laws reduce the quantity supplied of gas!
On airport capacity, Weber is simply wrong on supply being fixed too: it clearly increased as prices rose! Yes, you can’t grow the airport’s maximum capacity overnight, but (as economist Chris Conlon points out) airlines did run additional flights on Monday and Tuesday, increasing the supply of seats at higher prices. American Airlines alone announced 2,000 more seats out of Tampa and Sarasota on Monday and more than 2,000 late Tuesday evening out of Orlando. Would airlines have run as many extra flights if they couldn’t charge $400 for a one-way ticket but instead prices were capped at pre-hurricane levels? Probably not, given there are large costs of diverting empty planes, paying for extra staff time, and more.
When confronted with that clear evidence that the quantity of supply can and indeed does adjust to higher demand and prices, Weber pivoted. It’s not all price rises that are bad, she then said, but “excessive increases” once airport capacity is hit!
Yet here lies a major problem with this whole discussion. “Price gouging” is a loose term used colloquially to mean significant price increases in unusual emergency conditions. But it doesn’t have any economically accepted definition, let alone a consistent one in law. Different states that have anti-price-gouging laws define it in very different ways. Unclear standards like “unconscionably excessive” price increases create huge uncertainty for business. The desire to impose some sort of consistency leads some states, like Florida, to compare prices during the emergency to the previous 30 days, deeming price gouging a significant increase “unless the seller can justify the price by showing increases in its costs or market trends.” Yet before or after a hurricane, almost everything about local “market trends” for gas or flights or other goods changes. Some cost changes aren’t directly linked to the good being sold. Workers might demand more for staying in the area to open the station. Transport costs might go up. How far one can attribute these costs towards explaining price increases for individual products is unclear.
As Conlon pointed out to me, if senior economists and lawyers can’t even agree on which behaviors or what level of price increase violate these laws, “how is the manager of a gas station with dozens of angry customers queued up” supposed to predict accurately whether a price increase will be permissible? The very existence of these unclear statutes serves to chill a lot of activity that would otherwise take place, and so prevents important, life-saving resources getting to people who are willing to stump up the cash. Having the President and Vice President wading in with vague threats merely compounds the problem.
All good points, but minutia. What Milton really revealed is the mispricing of emissions of CO2 into the atmosphere (still zero) and of insurance premia that do not reflect the risks associated with the consequences of that mis-pricing.