AN EXAMINATION OF ANTI PRICE GOUGING LAWS AND SHORTAGES DURING COVID-19.

AuthorParsons, Steve

Table of Contents INTRODUCTION 39 1. FEDERAL APG ABILITIES 39 2. REVIEW OF STATE APG LAWS 41 3. POSSIBLE ECONOMIC RATIONALES FOR INTERVENTION OF MARKE 44 3.1. The Basic Economics of Price Controls 46 3.2. The History of Price Controls 51 3.3. Estimates of the Negative Impacts of Price Controls 52 4. POLITICS AND CONSUMER PERCEPTIONS REGARDING PRICE 54 INCREASES 4.1. Economically Irrational Consumers 54 4.2. Is There an Economic Justifications for APG Laws? 59 4.3. Which Types of Supply Responses Should be Stopped? 61 5. PEJORATIVE LANGUAGE AND CONFUSION WITH FRAUD 63 6. HOARDING AND LIMITS ON SALES 67 7. DIFFERENCES BETWEEN THE COVID-19 PANDEMIC AND OTHER 69 EMERGENCIES 7.1. The COVID-19 Pandemic is Longer in Duration than Most Other 70 Emergencies 7.2. There is No Physical Destruction Due to COVID-19 71 7.3. The COVID-19 Pandemic is Broader in Geographic Scope than 72 Any Past Emergencies 7.4. Externalities are More Pronounced in the Case of COVID-19 73 7.5. The Loss of Life and Economic Damage in the United States 74 Caused by COVID-19 is Far Greater than Any Past Emergencies 7.6. Personal Hoarding is More Likely during the COVID-19 76 Pandemic than Other Traditional Emergencies and Disasters 7.7. Suppliers Costs Rise More Sharply as a Result of COVID-19 76 7.8. A Higher Proportion of Underutilized Resources during the 77 COVID-19 in Comparison to Other Traditional Emergencies 8. RECOMMENDATIONS 79 SUMMARY AND CONCLUSIONS 82 INTRODUCTION

If an increase in demand or a decrease in supply occurs suddenly, normal market equilibrium-seeking processes will cause a relatively rapid increase in price. However, consumers dislike price increases. Therefore, if an emergency occurs, a price increase will trigger negative emotional responses from consumers and such emotional responses will be strong. This has led to thirty-five states, plus the District of Columbia, passing anti-price-gouging laws (APGLs) laws often contingent upon a declared state of emergency. (1) Unfortunately, economics clearly indicates that price controls, including APGLs, lead to shortages (or, at least, exacerbates shortages), which create a deadweight loss to society.

Section 2 describes federal APGL abilities, while Section 3 details state APGLs. In Section 4, this article describes the limited circumstances in which there is an economically valid rationale for governments to intervene in markets. This is followed by a description of the economic effects of price controls, including empirical estimates of deadweight loss to society. Section 5 discusses politics, economically irrational behavior by consumers, and the strongest economic argument for APGLs in the short run. Section 6 describes the pejorative use of language in legislation that is used to negatively paint price gouging. Section 7 briefly describes the demand-side effect of hoarding and suppliers' limits on purchases. In Section 8, this article evaluates six key differences between the COVID-19 pandemic and "traditional emergencies" (2). Based upon these differences, this article offers four recommendations regarding the design of APGLs, emergency declarations, and their enforcement in Section 9.

  1. FEDERAL APG ABILITIES

    There is no federal APG statute per se. However, the federal government still has generic abilities that can be employed against what may be perceived as price gouging. On March 23, 2020, the White House issued an "Executive Order on Preventing Hoarding of Health and Medical Resources to Respond to the Spread of COVID-19." (3) This executive order invoked the Defense Production Act, (4) stating "it is the policy of the United States that health and medical resources needed to respond to the spread of COVID-19, such as personal protective equipment and sanitizing and disinfecting products, are not hoarded." (5) Where hoarding is defined as "either in excess of reasonable demands of business, personal, or home consumption, or for the purpose of resale at prices in excess of prevailing market prices." (6)

    The executive order was followed on March 25, 2020, by a Department of Health and Human Services notice titled "Designation of Scarce Materials or Threatened Materials Subject to COVID-19 Hoarding Prevention Measures Under Executive Order 13910 and Section 102 of the Defense Production Act of 1950." (7) This notice listed the following "as scarce materials or threatened materials": "N-95 filtering face piece respirators" and two other categories of respirators (portable and non-portable ventilators). Moreover, the notice listed that "drug product[s] with active ingredient chloroquine phosphate or hydroxychloroquine HCl, PPE gowns, face masks, face shields and gloves, and disinfecting devices" were also considered "scarce or threatened materials." (8)

    The Department of the Attorney General published a "Memorandum for All Heads of Department Components of Law and Enforcement Agencies" on March 24, 2020 which emphasizes a zero-tolerance policy for economic abuse during the COVID-19 crisis. The memorandum states, "[w]e will not tolerate bad actors who treat the crisis as an opportunity to get rich quick... Accordingly, I am directing the immediate creation of a task force to address COVID-19-related market manipulation, hoarding, and price gouging." (9)

    The Justice Department created "The COVID-19 Hoarding and Price Gouging Task Force," led by U.S. Attorney Craig Carpenito and with assistance as needed from the Antitrust Division's Criminal Program, to address COVID-19-related market manipulation, hoarding, and price gouging. (10) The discussion in the March 26, 2020 U.S. Attorney's Office release focused on nine scams, one of which was "Price Gouging scams: When sellers and/or retailers sell or rent an item for a price 'which is grossly in excess of the price prior to the declaration' per KRS 367.374.'" (11) Two arrests in Brooklyn for price gouging violations garnered the greatest media attention. (12) These arrests are discussed below within Section 5.3 as "Case 1". Because enforcement numbers are changing rapidly and as this pandemic evolves, we have yet to quantify the level of enforcement of APGLs.

  2. REVIEW OF STATE APG LAWS

    This article primarily focuses on APGLs that have the following characteristics: (1) the applicability of the law is triggered by a disaster or civil emergency (often requiring a designation of the emergency by a specific government official); (2) the limitations on pricing only apply to those goods and services likely affected by the disaster; and (3) the applicability terminates at the end of the emergency. APGLs have generally been implemented through state law. However, two states, California and Tennessee, have created APGLs via long-standing executive orders. As of January 2020, thirty-five states in total, plus the District of Columbia, have implemented APGLs. Additionally, Delaware and New Mexico implemented APGLs via emergency declarations and executive orders specific to COVID-19. Since thirty-seven states now have APGLs (some by way of executive order), it is perhaps easiest to begin with a list of the states that do not currently have APGLs in effect: Alaska, Arizona, Colorado, Maryland, Minnesota, Montana, Nebraska, Nevada, New Hampshire, North Dakota, South Dakota, Washington, and Wyoming. (13) Furthermore, a number of states (including some states that do not have explicit price gouging statutes) have prohibited price gouging in executive orders issued in response to the COVID-19 outbreak. These states include Arkansas, California, Connecticut, Delaware, Hawaii, New Mexico (14) and Tennessee. (15)

    The fact that a state does not have an APGL does not mean that there is no mechanism to respond to price gouging. Virtually every state has an agency to which consumers can make complaints. However, without the statutory power and the specificity regarding products or services or the limit on price increases in APGLs, attempting to police anti-price gouging by way of a generic complaint mechanism is unlikely to be effective in most states. (16) Generic complaint processes are more likely to be effective against cases of fraud. It is true that price gouging may elicit strong emotions, but it is not fraudulent.

    New York was the first state to enact an APGL in 1979, after heating oil price increases during the prior winter. This law applied to "consumer goods and services vital and necessary for the health, safety, and welfare of consumers" at an "unconscionably excessive price," and applied during an emergency declared by the governor. (17) New York's action was followed by APGLs in Hawaii (1983), Connecticut (1986), and Mississippi (1986). "Then, 11 more states added anti-price gouging laws or regulations in the 1990s and 16 states followed in the 2000s" (18)

    One can categorize the various state APGLs in different ways. One taxonomy of APGLs is useful: (1) "a 'percentage increase cap' limit, which fixes post-disaster prices based on pre-disaster prices;" (2) a ban on "unconscionable" price increases; and (3) an "outright ban" on any increase in price above what is necessary. (19)

    Nine states have APGLs that reference a specific percentage increase cap. (20) California, New Jersey, Oklahoma, and West Virginia employ a 10% price increase cap. Oregon and Wisconsin use a 15% price increase cap, while Pennsylvania employs a 20% cap. Additionally, Alabama and Kansas use a 25% price increase cap. Finally, the District of Columbia does not use a specific percentage price increase cap, but rather employs a wholesale cost plus a typical retail markup rule.

    For those states without a specific percentage increase, nor an outright ban, the most common term is "unconscionable" price. (21) Other terms that are used for price increases that violate state APGLs are: "excessive," (22) "exorbitant or excessive," (23) "excessive and unjustified," (24) "unreasonably excessive," (25) "gross disparity" from prior prices, (26) "grossly exceeds,"...

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