Assessing Anti-Price-Gouging Statutes In The Wake of Hurricane Katrina:
Why They're Necessary in Emergencies, But Need to Be Rewritten

This is one in a special series of columns on legal issues arising in the aftermath of Hurricane Katrina. - Ed.

Recently, in an interview on ABC's "Good Morning America." President Bush announced that he would have "zero tolerance" for - among other things -- "price-gouging at the gasoline pump" in the wake of Hurricane Katrina.

"Price gouging" is often defined as a sharp rise in the price of basic necessities over a short period during a time of natural disaster. Before the hurricane, the federal government received about 21 gas price gouging complaints a day. Now, that number reportedly has risen sharply to 2,400 complaints a day.

Significantly, not all of those complaints are coming from states directly impacted by Katrina. Moreover, the attorney generals of states not directly impacted, have been investigating price gouging at the gasoline pump.

Why? In part, I will suggest, because they can. Twenty or more states currently have anti-price-gouging laws on their books. (They include Louisiana, which enacted its own anti-gouging law last month, a few weeks before Hurricane Katrina.) That's a good thing - but the way the statutes are written, is typically too broad.

Such statutes, I will argue, need to be very narrowly drafted - or, in the case of many already on the books, re-drafted - and they ought to be applied in limited circumstances.

The Price Gouging Actions In States Not Directly Affected by Katrina

So far, four states not directly affected by Katrina are considering, or have taken, action on alleged price gouging.

Florida's Attorney General filed a price gouging and false advertising lawsuit, stating that a Tallahassee based gas station unconscionably raised its prices during a declared state of emergency, and advertised prices falsely, to boot. The station is on a highway that Louisiana residents used to flee Katrina, but not within the hurricane zone.

California's Attorney General, meanwhile, is investigating whether, in Katrina's aftermath, oil companies colluded to raise prices. California's Attorney General is also characterizing the rise in gas prices as potential price-gouging at the pump.

The Governor and Attorney General of New Mexico have announced that they are planning a legal response to the report of "unfair spikes at gas pumps related to Hurricane Katrina." This will likely include a new anti price-gouging law. And even Vermont's Attorney General has been asked to investigate price gouging at service stations there.

The Need for Limitations on Anti-Price-Gouging Laws

True price-gouging is very ugly: A fellow citizen jacks up prices to exploit fellow citizens' vulnerability - due to a natural disaster that has left them bereft of the necessities of life.

But allowing "price-gouging" does have some arguable benefits. For one thing, it will incentivize shopkeepers and homeowners to devote their back rooms and basements to stockpiling for a natural disaster - when they otherwise might not find it economical to do so. Knowing prices will go up in a disaster, incentivizes us to prepare by buying them at normal prices now.

For another thing, allowing "price-gouging" may prevent a run on stores when a disaster does occur. If prices stay low even in a disaster, then a store's neighbors may quickly buy it out - buying beyond their needs. And subsequent would-be store customers may find that, for them, necessities are not available at any price.

Moreover, allowing suppliers to charge high prices allows them to offset substantial costs, hazards or inconvenience to themselves. Some storekeepers will selflessly stay open, despite risk to themselves, out of loyalty to their customers or plain human decency. But human nature being what it is, others will need a financial incentive to do so.

For these reasons, many free market fans feel "price gouging" gets a bad rap (and should have a less pejorative name). In their view, such pricing practices are simply a system for quickly distributing scarce resources to those who need them most -- as evidenced by what they are willing to offer in exchange.

But when people are poor - as so many affected by Katrina were - ability to pay is a poor proxy for need. Those who cannot afford to pay inflated prices, may find themselves in desperate straits - without milk for babies, or the drinkable water, minimum food, or important medicine needed to stay alive. We have rightly decided, in our society, not to let people suffer this way. And in an emergency, those who are most vulnerable need to be priced in, not priced out. Otherwise, human suffering - as well as "looting" and panic - will ensue.

Access to money, too, can be affected by a hurricane: If ATMs are underwater, or electricity is down, it won't only be the poor who have limited cash. If health insurance companies can't be reached to confirm eligibility, few will have the cash on hand to pay for expensive and urgently needed prescription drugs.

On balance, then, price-gouging laws may serve an important public policy for a very limited period of time. But to make sure the benefits of such laws exceed their costs, we need to be clearer in defining "price-gouging" in our statutes - making clear that such laws apply only in very limited circumstances, during the aftermath of a natural disaster.

(It's important to note that generally, the most-affected residents of New Orleans did not own cars to flee Hurricane Katrina. Rather, they needed access to basic food and water in the days following the Hurricane. The rise in gas prices in states like California is a secondary effect of the Hurricane.)

Price-Gouging Laws Are Far From the Only Legal Protections Consumers Enjoy

After all, it's important to remember that there are other laws, besides price-gouging laws, that protect consumers from unfair pricing - during, and outside of, emergency circumstances.

Most prominently, antitrust laws make collusion regarding prices - including gas prices - illegal. And many states allow for civil claims based on unfair trade practices.

In addition, in Florida -- as in at least twenty other states with similar laws on the books -- price ceilings are triggered during declared states of emergency.

The Problem with Current Anti-Price-Gouging Laws

Every price-gouging law must include some kind of standard to specify when a company will be deemed to be price-gouging. Unfortunately, some such standards are too vague - and others, while specific, are wrongheaded.

First, let's consider a vague standard: Florida's anti-gouging law -- passed in 1992 in response to massive gouging in the wake of Hurricane Andrew -- prohibits merchants from charging an "unconscionable price" for essential goods and services during an emergency.

A price is deemed unconscionable if - in the attorney general's view -- it "grossly exceeds" the average price for than similar commodity 30 days period to the state of emergency; and it is not attributable to costs incurred in connection with the sale of the goods.

During the 2004 record setting Hurricane season, the Florida Attorney Generals price- gouging hotline received 8,911 complaints. The number of complaints may have been related to the vagueness of the standard. "Unconscionable" may be in the eyes of the beholder; so may the judgment whether a given price "grossly" exceeds the prior average price for a good.

Now, let's look at a standard that's specific, but wrongheaded. In some states, price gouging is said to occur when goods or services cost anywhere between 10 to 25 percent more than they did prior to a declared emergency. But such a standard fails to provide any flexibility for costs associated with the need to conserve resources during a time of crisis.

Louisiana's statute is a bit better. It prohibits price gouging during a state of emergency -- as declared by the governor, or by the parish president. And it caps prices (at the price previously "ordinarily charged for comparable goods and services in the same market area").

But importantly, it also allows businesses to pass on increased costs for "reasonable expenses and a charge for any attendant business risk, in addition to the cost of the goods and services which necessarily are incurred in procuring the goods and services during the state of emergency".

That makes sense: The statute incentivizes merchants to incur risks, by allowing them to be compensated for doing so. It also protects them from having to buy high (from price-gougers) and then sell low, if they want to comply with the law.

And it recognizes that merchants, too, need to go on with their lives: If these merchants sell out their entire supply of necessities, there is no guarantee that they will get replacement goods, in order to earn their own living, in the months to come in places like New Orleans.

Each state should review its existing price-gouging statute to see if it is narrowly tailored to achieve its stated objective: preventing the sale of necessities to people in dire straits for grossly inflated prices. If the law is too vague, it should be made more specific. But it should also recognize, as Louisiana's does, the reality that it may actually make sense - and be in the interests of a society as a whole -- for prices to rise quite a bit in an emergency. If it is not possible to create a workable standard, perhaps we need to reconsider having such laws on the books.

Perhaps rather than raising prices, states should place a duty on shopkeepers and pharmacists to sell to those plainly in urgent need, at a price they can afford - or to give away food and medicine, if there is no other option. The states should then compensate for the different between the market price, and the price charged (which may be $0).

And more importantly, the government (rather than the private sector) should move rapidly to provide those in peril with access to necessities.

Should We Ever Have Anti-Price-Gouging Laws In Non-Emergency Situations?

In some states, a governor can also institute temporary price-gouging controls with an executive order, even if the state is not impacted directly by a natural disaster or emergency.

As noted above, four states not directly affected by Katrina have nonetheless taken action on post-Katrina price-gouging allegations. And the day after the terrorist attacks of September 11^th, for example, South Carolina's then-Governor Jim Hodges signed a 15-day executive order to prevent price-gouging on gas.

Meanwhile, some price-gouging laws apply even when there is no emergency - and may be better viewed, quite simply, as price controls. For instance, in New York, when it comes to milk, supermarkets are forbidden from charging any more than 200 percent above what a farmer sold it for originally.

Under New York State's General Business Law, the threshold for price gouging is 200 percent above the Class I price of fluid milk. Such price controls are vulnerable to all the arguments economists typically make: If one believes in the benefit of a market economy, then one should let prices be set by supply and demand, not by statute.

Enforcing State Anti-Gouging Statutes Is A Poor Way to Address Rising Pump Prices

What about those states who are looking into post-Katrina gas-pump price gouging, despite the fact that they were not directly affected by Katrina?

This state-by-state approach hardly seems like an ideal solution to what is really a nationwide problem with multiple causes, only one of which is Katrina. It's important to remember that gas prices were skyrocketing even before Katrina.

It will be absurd, too, if gas prices in one state are far higher than those in a neighboring state, just because one state aggressively polices prices, and the other does not. A nationwide problem needs a nationwide solution. We need to debate just what that solution ought to be.