Price Gouging Laws Extended Sandy's Pain

A year ago Hurricane Sandy battered the Northeast in a way never seen before and, we hope, never to be seen again. Thankfully, due to hard work from first responders, bridges were quickly reopened. Volunteers and supplies poured in and it looked as if the area would begin

to reclaim some much-needed normalcy soon.

It seemed odd that even with most trucking routes open, no gasoline was coming through. Refineries in New Jersey were badly damaged, severely limiting their output, but this problem went far beyond a supply chain disruption.

Rather, the gas shortage was created and perpetuated by government. Under New York State law it is illegal to sell products at "grossly excessive" prices during "an abnormal disruption of the market." Similarly, New Jersey criminalizes selling goods at “unreasonably excessive” prices during an emergency. Ignoring the use of legal terms that lack any hard-numbers or specifics (what constitutes excessive or abnormal?) there is still the basic economic law of supply and demand to consider. As the people of New York and New Jersey learned the hard way, attempting to circumvent an economic law can be disastrous. 

Calling in orders from elsewhere in the country would have been an easy solution to end the gas shortage that lasted for two weeks in some areas. Clearly, because shipping oil from Ohio rather than New Jersey is more expensive, the gas brought from elsewhere would cost more.  But, retailers in New York were not allowed to charge more than the “market price” so there was no incentive to bring in these trucks. 

Criminalizing the sale of goods at a level higher than deemed acceptable is misguided. If a good is sold, its sale price is the market price. That price is not something static that a bureaucrat or elected official can determine from afar. It is a dynamic level that comes from the perpetual, complex interaction among buyers and sellers. If price gouging laws were worded correctly, they would say that goods cannot be sold above a price retroactively determined by the government. 

Meanwhile, citizens of New York and New Jersey were left waiting in gas lines for hours since they had not adjusted their driving habits to the information a true price would have immediately conveyed. Gas at $3 a gallon tells consumers that there will be plenty of gas supplies to satisfy the foreseeable future’s demand and that they can drive with little regard for conservation. Gas at $5 a gallon alerts consumers that demand is higher than supply and that consumers may need to cut back. 

Many people, because the price of gas was still at pre-hurricane levels, hoarded the increasingly precious commodity. There was nothing in the price to deter them from doing so. It turned out that those who spent countless hours waiting in line were the lucky ones—soon there was no gas to be found at all. This persisted for almost two weeks in some areas after the hurricane made landfall.

Proponents of price gouging bring up the negative effects high prices would have on low-income people. While caring for those of limited means is laudable, attempting to help them in this way is destructive. While being protected from high prices, they are also “protected” from the option to purchase the good at all. Simply put, this is not a class issue—it is better for someone at any income level to pay $5 a gallon than to not be able to buy gas at all.

A more effective solution, if one’s goal is to help low-income people, would have been to let gas prices move based on market forces while providing vouchers to help purchase gas to those below a certain income level. This may push the cost of gas up, but it would ensure that an adequate gas supply was available.

People know that price controls do not work (think back to gas lines in the late 1970s), yet there is still strong, misguided, support for price gouging laws. Proponents fail to see that the two are the same. They both set an artificial price ceiling, which ensures that demand will exceed supply when the price reaches the ceiling, and they have the exact same effect—long lines that come from high demand for a scarce commodity.

After Sandy, 24 price gouging lawsuits were filed in New Jersey against gas station and hotel operators. In April the first two gas station operators in Clifton and Piscataway agreed to pay the state a combined $46,000 to settle charges. C.S. George & Sons in Clifton was accused of raising the price of gasoline by 34 percent after the storm, up to $4.69 a gallon. At Lukoil in Piscataway prices went up 17.5 percent. 

It turned out that the standard New Jersey used to judge price gouging was an increase of 10 percent, but this was applied with government’s discretion, not to all merchants.  If states stubbornly insist on keeping their price gouging laws, they should at least have one law and apply them to all commodities and all sellers, and determine the acceptable price increase in advance.

New York Attorney General Eric Schneiderman claims he obtained almost $300,000 worth of penalties from 43 gas stations that engaged in illegal price gouging after the storm. The owner of a BP in Huntington, Mirza Aliamand, called the lawsuits unfair, since his costs rose after the storm as he hired extra people to manage the endless lines of cars. “I went above and beyond to do what I had to do to serve my community," he said.

Sadly, the pain caused by these laws could easily strike again. Thirty-four states and the District of Columbia have anti-price gouging laws. This means the next tornado, flood, hurricane, or earthquake could bring unnecessary hardship to an already difficult situation.

If there had been no price gouging laws during Hurricane Sandy there likely would have been no gas shortage. Let us hope that other state and local governments can learn from this painful lesson.

Jared Meyer is a Research Associate at the Manhattan Institute.