News Story

Take Your Pick: ‘Price Gouging’ Or Toilet Paper Shortages

Scarcity pricing in emergencies is reasonable and humane; there’s no repealing law of supply and demand

Michigan Gov. Gretchen Whitmer issued an executive order on March 15 to impose price controls on stores and individuals between March 16 and April 13. Merchants will be prohibited, the order said, from selling “any product” at a price 20% or more above the March 9 price. The order allows an exception if it can be demonstrated that the increase is attributable to increases in the cost of bringing the product to market.

Individuals are banned from selling “any product from a retailer” for an amount that is “grossly in excess of the purchase price” originally paid.

A press release announcing the order described it as applying to “goods, materials, emergency supplies, and consumer food items.” The order makes clear that this applies to “any product in this state,” not just ones related to responses to the COVID-19 coronavirus epidemic.

This follows an earlier press release from Attorney General Dana Nessel asking residents to report cases of alleged price gouging by local businesses, which she says likely violate the Michigan Consumer Protection Act.

“Supply and demand might be a familiar saying for retailers, but price-gouging is against the law and protecting consumers against unfair business practices is a service my office provides to residents,” Nessel said in a press release. “My Consumer Protection team reviews all complaints we receive and determines whether appropriate legal action should be taken.”

But free-market economists say Whitmer’s order and Nessel’s potential prosecutions will create more harm than good and don’t address the core problem: consumer hoarding.

For example, Facebook has been saturated with posts from across Michigan showing empty supermarket aisles that previously had been stocked with toilet paper.

“The toilet paper aisle in the middle of Podunk Michigan,” posted Jamie Hope of St. Johns on March 12. The accompanying photo showed a nearly empty aisle with a sign affixed by management stating, “Demand for this product is extraordinary high.”

“What is wrong with people?” Hope asked.

The sudden rush to purchase large quantities of toilet paper has left many perplexed.

“The main problem today is the panic over-buying and hoarding by consumers who got to the stores first and bought up all of the critical supplies, which then created shortages of those supplies for consumers who unfortunately arrived later to find depleted inventories and empty store shelves,” said Mark Perry, an economist with the University of Michigan-Flint. “If prices for critical supplies had been allowed to increase to reflect the new, higher demand it would have discouraged some of the panic buying that is the real reason for the empty store shelves.”

Perry continued: “The Attorney General’s position of preventing higher prices in response to higher demand for critical supplies along with reduced supplies during the coronavirus outbreak is economically misinformed and misguided and is guaranteed to make the situation worse, not better. Accurate, higher market prices that reflect the new market conditions will allocate scarce supplies much more efficiently during this emergency situation than inaccurate prices that are kept artificially low by government mandate.”

Antony Davies, an associate professor of economics at Duquesne University, and James Harrigan, the managing director of the Center for the Philosophy of Freedom at the University of Arizona, addressed the free-market response to claims of price gouging.

“Among economists, price gouging isn’t a thing,” Davies and Harrigan wrote in an op-ed. “The term simply reflects the emotional response non-economists have to rapid price increases. What politicians and other anti-price gouging proponents would have you believe is that we can have what we want, at the price we want, simply by passing a law.”

Davies and Harrigan wrote that passing an anti-gouging law doesn’t change the reality that there isn’t enough product to go around.

Such a law gives buyers an incentive to hoard, they wrote, adding that it “dissuades sellers from bringing more to market, which is exactly the opposite of what we want.”

Other economists have noted the danger that in an emergency situation, artificially low prices could cause potentially life-saving items to become unavailable at any price. One example would involve a mother who needs ice to preserve her diabetic child’s insulin after a hurricane knocks electric power utilities off line.

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.