An Unintended Consequence of Anti‐Price Gouging Legislation?
By Ryan Bourne, courtesy of the Cato Institute
Cato scholars have written extensively on the damaging impacts of anti‐price gouging laws during emergencies. Traditionally, we worry about ongoing shortages of goods as a result of market price rises being prevented or suppressed. This consequence is likely to be more significant during COVID-19 than after very localized, transitory emergencies, such as hurricanes or power outages.
After, say, a hurricane, large firms who might benefit from a reputational boost for being seen to “ship in” supplies from nearby regions still have somewhat of an incentive to do so. It is only for a short time period, after all, and though we’d still imagine the supply response will be weaker than if prices were able to adjust, this behavior would mitigate some of the immediate problem.
In an indefinite global pandemic, as faced in spring 2020, there is no obvious “other place” from which to shift supply. What’s more, the emergency lasts for a lot longer—changing demand patterns semi‐permanently. Hence, suppressing price signals through anti‐price gouging legislation is likely to have a bigger, longer effects in terms of unfulfilled demands. This is a theme explored in my forthcoming book, Economics In One Virus.
But might there be another, more deadly, consequence of these anti‐price gouging laws during a pandemic? That possibility is supported by results in an intriguing new paper by Rik Chakraborti and Gavin Roberts (hat‐tip to Pierre Lemieux).
The pair hypothesize that states invoking or introducing anti‐price gouging legislation during COVID-19 would cause consumers to engage in greater search efforts to find goods because of the empty shelves the laws entrench. In a pandemic, this might mean heightened social contact as certain shoppers visit more stores searching for, say, hand sanitizer or toilet paper, therefore risking a greater spread of the disease and, ultimately, deaths. (Remember, masks were much less of a thing back then too).
The economists use cellphone location data, combined with state‐level variation on when anti‐pricing gouging laws are triggered, and a whole range of control variables including population density, lockdown regulations, and more, to try to identify the impact of the price gouging laws on human contact in commercial venues in March and early April. They find that states where anti‐price gouging laws are activated saw the average individual’s social contacts increase by at least 3.3 other mobile devices per day. They combine these results with information on lagged cases and deaths to suggest that the legislation might have accounted for 25 percent of average state daily deaths in April.
There are a lot of uncertainties here, obviously, with a ton else going that possibly biases their estimates’ magnitudes. Their regressions imply that lockdowns don’t significantly reduce social contacts, for example. Though they may have had less of an impact in those early days given many people voluntarily decided to stay home anyway, that seems unlikely, at least on the margin. The researchers are careful to control for state‐specific effects, yet it’s possible there’s some additional factor that explains some of the uplift in risk.
But the failure for prices of “essential” goods to rise may well have caused others to engage in a frantic chase around numerous stores to try to get hold of them. Given the U.S. was in an “exponential growth” phase of COVID-19 cases back then, early search efforts that raised infections could have caused very large impacts on deaths over a good number of weeks afterwards.
Yes, even without anti‐price gouging legislation and with (usually smaller stores) raising prices, it would take some time for shortages to be eliminated, as suppliers ramped up production, induced by the more powerful incentive. But remember, higher prices also dampen the quantity demanded—and so anti‐price gouging laws may well have caused some people to over‐purchase or hoard, leaving others, who really did value obtaining the products highly, on a COVID‐19‐spreading wild goose chase for the items they wanted.
More research on this needed, but even if the estimated effect is an overstatement, the direction is certainly intuitive, raising another criticism of anti‐price gouging legislation in a pandemic.
Ryan Bourne occupies the R. Evan Scharf Chair for the Public Understanding of Economics at Cato. He has written on a number of economic issues, including: fiscal policy, inequality, minimum wages, infrastructure spending and rent control.