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235

THE PRICE IS RIGHT!:

REGULATION, REPUTATION, AND RECOVERYBRIAN SKARBEK* AND DAVID SKARBEK**

Citizens and legislatures alike have become increasingly fearful of disasters and have

sought to provide remedies to their harmful effects. One popular remedy has been the

imposition of post-disaster price controls through state price gouging laws. In the

legal literature these laws have been widely supported, while the economic literature

largely condemns them.

This article attempts to reconcile the two fields views of price gouging laws. To our

knowledge, it is the first comprehensive and detailed list of all price gouging laws.

This objective summary will serve to foster a more well informed debate about the

benefits of price gouging laws. The article investigates the long term and unseen

effects of price controls in a disaster context by examining the incentives created byallowing market prices. Higher prices in a post-disaster setting have the beneficial

effect of creating incentives for out of region sellers to bring needed goods in,

encouraging demanders to conserve, and spurring entrepreneurial discovery of

innovative ways to meet peoples needs. Finally, the article addresses the real problem

of post disaster fraud and proposes a more desirable approach to deterring fraud than

current price gouging laws. The risk of losing reputation will deter established sellers

from engaging in fraud. Price gouging laws will deter those same sellers from

operating in many post-disaster markets. Price gouging laws will encourage more

sales by those sellers who will commit fraud.

I. INTRODUCTION .......................................................................................... 236II. THE STANDARD ECONOMIC VIEW OF PRICE GOUGING LAWS .............. 239III. SURVEY OF STATE PRICE GOUGING LAWS ...........................................247

A. Allowable Price Increase.............................................................. 247B. Determining Pre-Disaster Prices ..................................................249C. Covered Goods and Services .......................................................249D. Exception for Increased Costs .....................................................251E. Sellers Covered .............................................................................252F. Activation.......................................................................................253G. Duration......................................................................................... 255H. Penalties ........................................................................................256

* The authors thank Bradley Joondeph, Kerry Macintosh, Eric Wright, Jack Estill, and Matt

Zwolinski for helpful suggestions and criticisms to earlier drafts of this paper. Brian Skarbek is a

J.D. candidate at Santa Clara University.

** David Skarbek is a Ph.D. student in the Department of Economics at George MasonUniversity. He also gratefully acknowledges generous research support from the Earhart

Foundation.


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236 THE DARTMOUTH LAW JOURNAL Vol. VI:2

IV. THE STAGES OF RECOVERY AND THE QUICK FIX OF PRICE

CONTROLS .......................................................................................... 264

V. FIXING FRAUD: REGULATION OR REPUTATION? ................................... 266

A. The Overlap of Contract and Price Gouging Laws forPunishing Fraud..........................................................................267

B. Reputation Costs Can Deter Fraud .............................................. 271

VI. CONCLUSION: ENHANCED JUDICIAL PROCESS ..................................... 274

I. INTRODUCTION

On September 16, 2004, Hurricane Ivan made landfall, ravaging the

gulf coast.1 It brought 130 mile per hour winds and waves that reached

fifty-five feet in height.2 Ivan left destruction in its path, killing twenty

people, cutting bridges in two, burying or collapsing highways, and

submerging homes.3 As many as five million people in the Gulf Coast lostpower.4 In Florida, the destruction of electrical and water supply routes left

hundreds of thousands of people without services.5 Furthermore, two other

hurricanes had ravaged Florida within the month.6 Governor Jeb Bush

seemed as helpless in the situation as the general public, stating, Its sad, I

dont know quite why weve had this run of storms.7

In the wake of this storm, John Charles Mikell and John Tate Mikell

drove a pickup truck that was towing a horse trailer filled with gas

generators to Santa Rosa, Florida.8 Many residents of Santa Rosa County,

like people all across the state, had experienced power outages.9 Financed

by a friend, they ventured an approximately 630 mile, ten and a half hour

round-trip down the Florida coast10 to deliver gas generators to desperate

survivors.11 They sold these generators for $650, receiving a $100 profit.12

1 Felicity Barringer & Andrew C. Revkin, Hurricane Ivans Fury Kills 20 Along the GulfCoast, N.Y. TIMES, Sept. 16, 2004, available atwww.nytimes.com/2004/09/16/national/16CND-

STORM.html?fta=y.2 Id.3 Id.4 Id.5 Florida v. Mikell, complaint at 4, (2nd Cir. 2005),

http://myfloridalegal.com/MikellComplaint.pdf (last visited Jan. 4, 2008).6 Barringer, supra note 1.7 Id.8 Mikell complaint, supra note 5, at 4.9

Id.10 See Google.com, Levy, Florida to Milton, Florida - Google Maps,

http://maps.google.com/maps?hl=en&tab=wl (last visited Jan. 4, 2008); Mikell complaint, supra

note 5, at 3-4.11 Mikell complaint, supra note 5, at 4.12 Id. at 5. The generators retailed for $299.99; John Charles Mikell stated that he had


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Spring 2008 THE PRICE IS RIGHT 237

Because of their ambition, or perhaps greed, twenty-two people received

gas generators13 that would heat up stoves, prevent food from spoiling,

allow them to listen to important news reports, and keep the lights on after

dark.More survivors would have regained electricity, but investigators from

the Attorney Generals recently instituted Hurricane Task Force stopped

the two men.14 In return for their long, dangerous drive, investigators

charged the men with violating price gouging laws, seeking disgorgement

of all revenues generated and civil penalties in the tens of thousands of

dollars.15

Disasters, such as Hurricane Ivan, cause widespread destruction of

personal property and infrastructure. They leave many victims without

food, water, electricity, and medical supplies, which they must now rebuy.

In response to this crisis, legislatures in many states have enacted price

gouging laws.16 Price gouging laws prohibit sellers from raising the price

of many necessary goods after a disaster hits.17 Since price-gougers selldesperately needed goods in times of emergency at higher prices, many

people decry the practice, considering these sellers to be profiteers and

looters.18

planned to pay the financer, Frank DeCarlo, $550 for each. Id. at 5.13 Mikell complaint, supra note 5, at 5.14 Edward J. Page & Min K. Cho, Price Gouging 101: A Call to Florida Lawmakers to

Perfect Floridas Price Gouging Law, 80 FLA. B.J. 49, 50 (2006). The Attorney GeneralsHurricane Task Force was created on August 14, 2004, to investigate price gouging complaints.

Id.15 Mikell complaint, supra note 5, at 7-8. The attorney general sought a $1,000 penalty for

each violation of Floridas price gouging statute, $25,000 in civil penalties, plus attorneys fees

and costs. Id.16 See e.g. ARK. CODE ANN. 4-88-301 (2001);CAL. PENAL CODE 396 (West 1999 &

Supp. 2007); FLA. STAT. ANN. 501.160 (West 2006 & Supp.2008); N.Y. GEN. BUS. LAW

396-r (McKinney 1996); see also Geoffrey C. Rapp, Gouging: Terrorist Attacks, Hurricanes, and

the Legal and Economic Aspects of Post-Disaster Price Regulation, 94 KY. L.J. 535, 542-43(2005) (listing several states that enacted their price gouging laws in direct response to particular

disasters). Throughout this article we will refer to these laws simply as price-gouging laws, as

opposed to anti-price gouging laws.17 See e.g., Price Gouging Act, 73 PA. STAT. ANN. 232.1 (West Supp. 2007) (parties

involved in the sale and resale of consumer goods and services sometimes take unfair advantage

of consumers in the commonwealth by charging unconscionably excessive prices or pricegouging).

18 See Gary E. Lehman, Price Gouging: Application of Floridas Deceptive and Unfair Trade

Practices Act in the Aftermath of Hurricane Andrew, 17 NOVA L. REV. 1029, 1033 n.22 (1993)(quoting Bob Butterworth, a former Florida Attorney General, from Beatrice E. Garcia, Prices for

Building Supplies Soaring, MIAMI HERALD, Aug. 28, 1992, at 6A, I dont see any differencebetween the looters, who go through the rubble in trailer parks, and the business people who cashin on this disaster by gouging customers.); Page, supra note 14, at 49 (states [i]n the midst of

recovery, price gouging profiteers preyed upon hurricane victims, and refers to these sellers as

lurking predators whose primary goal is to take advantage of consumers misfortunes.);Frederic A. Kerstein, An Overview of Post-Disaster Fraud, 18 ST. THOMAS L. REV. 791


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Therefore, popular support for price gouging laws and animosity

toward price gouging sellers exist among voters and the media.19 It is not

surprising that a person struggling to recover and rebuild from a disaster

will detest price gouging. While their whole world has crumbled, the sellerseemingly gets rich from the tragedy. Most people, however, only see the

increase in price that they pay for a good they desperately need; they do not

investigate or understand the economic forces at play or the effect that

price has on the supply of the good.20

Popular support for price gouging laws consequently creates strong

incentives for legislatures to enact them.21 In the wake of a disaster,

politicians feel the need to do something and often want to be seen as doing

something to help.22 Price gouging laws, which involve no additional costs

for government except for enforcement, are one of the fastest and cheapest

methods of intervening, making them a very attractive choice for

politicians.23 Because of this fact, almost every state that encounters

regular disasters has a price gouging statute.24 Since 2001, fears aboutterrorist attacks have led many additional states to institute price gouging

laws.25

(2006) (describing price gougers as unscrupulous and equating them to contractors who take

payment but never do the work).19 See Rapp, supra note 16, at 542 (Arkansas unusually popular [price gouging act] passed

by a vote of 88 to 1.); see Gregory R. Kirsch, Hurricanes and Windfalls: Takings and Price

Controls in Emergencies, 79 VA. L. REV. 1235, n. 149 (1993) (listing anti-price gouging news

headlines such as Price Gougers Like Buzzards on a Road Kill, and Free Market? Its Price

Gouging and It Stinks!).20 See FREDERIC BASTIAT, SELECTED ESSAYS ON POLITICAL ECONOMY (George B. de

Huszar ed., Seymour Cain trans., The Foundation for Economic Education, Inc., 1995), available

athttp://www.econlib.org/ library/Bastiat/basEss1.html (In the economic sphere an act, a habit,an institution, a law produces not only one effect, but a series of effects. Of these effects, the first

alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge

only subsequently; they are not seen; we are fortunate if we foresee them.). In the disaster

context, the low prices that result from price gouging laws are seen, but the sellers who do not

bring new goods to market are not seen.21 See generally BRYAN CAPLAN, THE MYTH OF THE RATIONAL VOTER: WHY

DEMOCRACIES CHOOSE BAD POLITICIANS (Princeton University Press 2007) (discussing the

interplay between self-interested politicians and voters who lack the incentives to become well

informed on crucial issues, leading to the implementation of detrimental policies).22 Kirsch, supra note 19, at 1258.23 Id.24 See infra Part III.i.25 See e.g., Tennessee Price-Gouging Act of 2002, Tenn. Code Ann. 47-18-5101(4) (Supp.

2007) (Because of the September 11th, 2001, terrorist attacks that took place in New York and

Arlington, Virginia, some businesses across Tennessee engaged in the economic practicecommonly known as price-gouging.); see also IDAHO CODE ANN. 48-603 (2003 & Supp.

2007) (effective July 1, 2002); IND. CODE ANN. 4-6-9.1-1 to -7 (West Supp. 2007) (approved

Mar. 6, 2002); KY. REV. STAT. ANN. 367.372-.378 (LexisNexis Supp. 2007) (effective July

13, 2004); N.J. STAT. ANN. 56:8-107 to -109 (West Supp. 2007) (effective Jan. 2, 2002); N.C.

GEN. STAT. 75-37 to -38 (2005) (effective Aug. 13, 2004); S.C. CODE ANN. 39-5-145 (Supp.


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Because widespread support for these laws exists, it is important to

examine the practice of price gouging and determine what effect allowing

or precluding increased prices has on a post-disaster recovery effort. This

article suggests that the disasters destroy wealth, price-gougers do not, andhigh prices in post-disaster settings have beneficial effects. The high prices

most efficiently allocate resources that the disaster has made scarce and

provide incentives for out-of-market sellers, such as the Mikells, to

transport needed goods through a disaster area to the people who truly need

them.

Part II summarizes the economic arguments in favor of post-disaster

price flexibility: higher prices allocate resources to those who need them

most and encourage greater supplies.26 Part III summarizes state price

gouging laws in detail.27 It analyzes eight important characteristics of price

gouging laws and the implications of each variation.28 Part III.i. provides a

chart summarizing each states law.29 Part IV discusses the phases of

recovery from a disaster, concluding that the price gouging lawsimplemented in the short term phase have long term negative effects in the

long term recovery phase.30 Part V analyzes the difficulty of deterring

post-disaster fraud under contract law and discusses the role of sellers

reputation in decreasing fraud.31 Part VI proposes the repeal of all post-

disaster price controls and advocates using reputation, contract law and an

enhanced judicial process dedicated to disaster claims to regulate post-

disaster fraud.32

II. THE STANDARD ECONOMIC VIEW OF PRICE GOUGING LAWS

Many state laws maintain that free markets generally work well, but

in times of crisis, markets require government intervention in the form of

price gouging laws.33 We argue that damage from a disaster, such as to

2006) (effective July 2, 2002); Tennessee Price-Gouging Act of 2002, TENN. CODE ANN. 47-

18-5101 to -5104 (Supp. 2007); Price Controls During Emergencies Act, UTAH CODE ANN.

13-41-101 to -102, -201 to -202 (2005 & Supp. 2007) (effective May 2, 2005); V T. STAT. ANN.

tit. 9, 2461d (2006) (approved May 29, 2006); Virginia Post-Disaster Anti-Price Gouging Act,

VA. CODE ANN. 59.1-525 to -529.1 (2006) (approved Apr. 14, 2004); W.VA. CODE 46A-

6J-1 to -6 (2007) (effective June 8, 2002).26 See infra Part II.27 See infra Part III.28 See infra Part III.a-h.29

See Table Summarizing State Price Gouging Laws, infra Part III.i.30 See infra Part IV.31 See infra Part V.32 See infra part VI.33 See e.g., W.VA. CODE 46A-6J-1 (2007) (While . . . pricing . . . is generally best left to

the marketplace under ordinary conditions, when a declared state of emergency results in


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infrastructure, hinders market activity and that flexible prices would

actually aid response and recovery. Prices are significant because they

allocate resources, create incentives for sellers and consumers to use

resources efficiently, and spur entrepreneurial innovation.The traditional economic argument in favor of flexible pricesemphasizes the role of prices as an allocation mechanism, which can be

illustrated by examining supply and demand curves. Demand for a good

has an inverse relationship with the price., resulting in a downward sloping

demand curve, such that the higher the price rises along the Y-axis, the

quantity demanded will fall lower on the X-axis.34 Holding all other

variables constant, people will tend to purchase more quantities of a good

at a lower price than at a higher price. Supply, on the other hand, has a

positive relationship with price; its curve is upward sloping, such that the

higher the price rises on the Y-axis, the quantity supplied will fall higher on

the X-axis.35 People become more willing to sell a product as the price they

can receive for it rises, ceteris paribus.When market participants are unmolested, the price and quantity of a

good will tend toward the intersection of the supply and demand curves. 36

If the price is greater than this intersecting point, then the quantity of the

good people want to sell will be greater than the quantity people want to

buy, so sellers will have to lower their price to complete sales. Similarly, if

price is below this intersecting point people will want to buy more goods

than sellers are willing to offer. Buyers will bid up the price to obtain the

good. These market forces will determine the price of a good and the

quantity of it sold. Only at the point where supply and demand are at the

equilibrium price will everyone who wants to purchase a good find a

willing seller of that particular good.37 In this situation, where price is at

the equilibrium, no purchaser can be made better off without someone else

being worse off.38 That is, at any other price, some market participants will

be left with goods they wanted to buy or sell but were unable to do as such.

abnormal disruptions of the market, the public interest requires that excessive and unjustified

price increases in the sale of essential consumer goods and services be prohibited.); see also

ARK. CODE ANN. 4-88-301 (2001); CAL. PENAL CODE 396 (West 1999 & Supp. 2007); N.J.

STAT. ANN. 56:8-107 (West Supp. 2007); N.Y. GEN. BUS. LAW 396-r (McKinney 1996);

N.C. GEN. STAT. 75-37 (2005); Price Gouging Act, 73 PA. STAT. ANN. 232.1 (West Supp.

2007); Tennessee Price-Gouging Act of 2002, TENN. CODE ANN. 47-18-5101 (Supp. 2007).34 See David R. Henderson,Demand, in THE FORTUNE ENCYCLOPEDIA OFECONOMICS 7, 7-8

(David R. Henderson ed., 1993).35

See Al Ehrbar, Supply, in THE FORTUNE ENCYCLOPEDIA OF ECONOMICS, supra note 34,at86, 86-87.

36 See E. Roy Weintraub, Neoclassical Economics, in THE FORTUNE ENCYCLOPEDIA OF

ECONOMICS, supra note 34,at 135, 135-138.37 See id.38 See id.


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Price gouging laws intentionally set the price at below the equilibrium

level.39 At this price, people demand more of the good. Faced with lower

remuneration, sellers are willing to sell less.40 At this lowered price, buyers

demand more than sellers are willing to provide, so a shortage occurs.41

Ashortage, by definition, means that more people want the good than is

available. This distance indicates the amount of the good that people want

but cannot obtain.42 If the price were free to rise, then demanders would

bid the price up, encouraging new sellers and discouraging buyers, which

would eliminate the shortage.43 Price, in this case, would continue to rise

until it reached the equilibrium level.44

Historically, evidence demonstrates that price controls lead to

shortages. For example, compare two housing crises: one after the San

Francisco earthquake of 1906, when nearly half of the citys housing was

destroyed, and the other after World War II, when returning soldiers

throughout the United States could not find housing.45 The former situation

relied on market prices, and rebuilding those houses was speedy. In thelatter example, price controls held housing prices below equilibrium levels,

resulting in a long housing shortage.46 Many other examples of shortages

due to price controls exist due to price controls. Minimum wages set prices

below equilibrium levels, leading to employment shortages or

unemployment.47 Socialist economic policy in Eastern Europe kept prices

below equilibrium levels, leading to shortages and long lines for virtually

everything.48 The Allied Controlled Authority kept Hitlers price controls in

place after WWII; these resulted in food shortages by 1948. 49 Nixons

39 Seeinfra Part III.a.

40 See Hugh Rockoff, Price Controls, in THE FORTUNE ENCYCLOPEDIA OF ECONOMICS,supra note 34,at 416, 416-420.

41 See id.42 See id.43 See id.44 See id.45 Milton Friedman & George J. Stigler,Roofs or Ceilings? The Current Housing Problem, in

POPULAR ESSAYS ON CURRENT PROBLEMS 1-3 (Foundation for Economic Freedom, 1946),

available at http://www.fee.org/library/books/Roofs_or_Ceilings.asp. This informative article,

written by two future Nobel Laureates, reveals that the shortage of housing caused by the 1906

San Francisco earthquake was alleviated within 6 weeks. On the other hand, under the price

ceilings in 1946, a far smaller housing shortage turned into the most critical problem facing

California, according to that States governor. Id.46 Id.47 Browning, Edgar K. and Mark A. Zupan. (2002). Microeconomics: Theory and

Applications. 7th Ed. Pp. 492-495.48 Lipton, David, "Eastern Europe". The Concise Encyclopedia of Economics. Library of

Economics and Liberty. Retrieved February 6, 2008 from the World Wide Web:

http://www.econlib.org/library/Enc/EasternEurope.html49 David R. Henderson, German Economic "Miracle," in THE FORTUNE ENCYCLOPEDIA OF

ECONOMICS, supra note 34, at 738, 738-42.


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price controls on gasoline led to shortages.50 Theory and history conclude

that price controls set below equilibrium levels lead to shortages.

Prices perform an important role in the market economy: they

communicate information about the relative scarcity of resources and createincentives for people to respond to others needs.51 As Vincent Ostrom

explains,

[T]he experience of buying and selling in competitive market

economies evokes levels of information and common knowledge placed on

a scale of value expressed in prices that is not only advantageous to buyers

and sellers but informative to any entrepreneur who may seek to take

advantage of opportunities that are available.52

When a resource, for example ice, has become more scarce, its price

rises. It is not necessary for consumers and sellers to know why ice has

become scarcer; they need only to see the higher price to know that it has. 53

While increased scarcity is unfortunate, given that it exists, flexible prices

facilitate market response to that scarcity.Consider a community struck by disaster and in need of ice. Many

people will covet ice but not everyone wants it as strongly. For example,

one person may want ice to store his penicillin, whereas another desires ice

simply to keep sodas chilled. Higher prices communicate to consumers

that ice has become more scarce, so they should conserve it. Therefore,

higher prices encourage the soda drinkers to forego ice, resulting in the ice

being available for the more needy consumer.54 If the price did not rise, the

soda drinker would have less information about the increased scarcity and

less incentive to conserve.

When price gouging laws are effective, shortages may lead to

resources being sold by less efficient sellers and on the black market.55

These secondary markets generally are not used in normal times because

they are more expensive to both the buyer and seller.56 Eliminating black

50 Fiona M. Scott Morton, The Problems of Price Controls, REGULATION, (Spring 2001).51 See LUDWIG VON MISES, HUMAN ACTION: A TREATISE ON ECONOMICS 327-395 (4th ed.

1996) (1949).52 Vincent Ostrom, The Meaning of Democracy and the Vulnerability of Democracies 107

(Ann Arbor: The University of Michigan, 1997).53 See Friedrich A. Hayek, The Use of Knowledge in Society, 35 AM. ECON. REV. 327, 519-

30 (1945).54 Geoffrey C. Rapp argues that price gouging laws may lead to improvements in allocative

efficiency when massive electronic payment system failure occurs or when sellers make pricing

decisions with biased decisions heuristics. See Rapp, supra note 16, 535. For a response to this

argument, see David Skarbek, Market Failure and Natural Disaster: A Reexamination of Anti-Gouging Laws, PUB. CONT. L.J. (forthcoming).

55 See Jack Hirshleifer, Disaster and Recovery, in THE FORTUNE ENCYCLOPEDIA OF

ECONOMICS, supra note 34,at 625, 625-630.56 See JACK HIRSHLEIFER ET AL., PRICE THEORY AND ALLOCATIONS: DECISIONS, MARKETS,

AND INFORMATION 47-48 (7th ed. 2005).


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markets, however, is practically impossible, since they are capable of

flourishing in the most restrictive environments, such as prisoner of war

camps. When people are willing to pay higher prices, deal with less

scrupulous sellers, bear the risk of legal sanctions, and cannot engage inlegal exchanges, black markets will arise. 57 The costs associated with

black markets, as compared to legal markets, are much higher. Especially

in times of crisis, we want resources to be used more, not less, efficiently.

As previously stated, prices allocate resources to consumers. If

prices are not allowed to do this function, some other mechanism must be

used.58 Allocative efficiency, which is when the person who values the

good the most is the one who receives it, is one of the traditional metrics

that economists use to judge allocation mechanisms.59 Of course, this is not

the only possible criteria. Questions of distributive justice, for example,

may be the primary concern to some people.

Economic tools are especially good at analyzing efficiency, but they

are poorly suited for judging the philosophical merits of different outcomesor processes. The analysis that follows does not consider arguments about

justice but instead focuses on economic efficiency, for several reasons.

First, philosophers have debated justice for thousands of years. Space

requirements herein prevent a fair treatment of theories of justice and their

application to price gouging laws. Economic arguments can still inform

ones position, regardless of the philosophical conclusion they reach.

Second, price gouging laws do not enact a just allocation method; they

simply outlaw a particular type of allocation method without creating an

alternative. This article argues for the efficiency merits of the outlawed

allocation method and the abolition of the current statutes; concerns about

distributive justice are a new, independent claim about what allocation

mechanism should be used, not about the current laws. For a philosophical

criticism of price gouging laws, see Jeremy Snyder.60 For a philosophical

defense of the ethics of price gouging, see Matt Zwolinski.61

The number of potential allocation mechanisms is infinite: goods

57 See R. A. Radford, TheEconomic Organization of a P.O.W. Camp, 12 ECONOMETRICA

189, 189-201 (1945).58 See Rockoff, supra note 40, in THE FORTUNE ENCYCLOPEDIA OF ECONOMICS, supra note

34,at 416, 416-420.59 See Browning, Edgar K. and Mark A. Zupan. (2002). Microeconomics: Theory and

Applications. 7th Ed. P. 155. In addition to allocative efficiency, economists also analyze

exchange efficiency, which examines the deadweight loss that occurs when mutually beneficial

exchanges do not take place. See Browning, Edgar K. and Mark A. Zupan. (2002).Microeconomics: Theory and Applications. 7th Ed. P. 146.

60 Jeremy Snyder, Whats the Matter with Price Gouging?, presented at the American

Philosophical Society Pacific Division Annual Meeting, Mar. 21, 2008 (copy on file with author).61 Matt Zwolinski, The Ethics of Price Gouging, 18 BUS. ETHICS Q. (Forthcoming, July,

2008).


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could be allocated based on height, LSAT scores, athletic prowess,

mathematical acuity, and so forth, so space necessitates analyzing only a

few of them. Our analysis focuses on what we perceive to be the most

obvious and popular alternative mechanism: queues.Queuing results in the first come, first served allocation.62 Although

this method may seem like a fair method, it has several problems. First, it

awards goods on the basis of ones place in line rather than the intensity of

ones desire for the good. If the soda drinker happens to be in the front of

the line, ice may not be available to store the sick persons penicillin.

Unless the line forms in exact relation to peoples willingness to pay for the

good, allocative inefficiency will inevitably occur.

Second, even though the money cost for a good may be lower when

queuing occurs, waiting in line is also costly since people must forego other

activities.63 Whereas higher money costs are a benefit to the seller, no one

benefits from time spent waiting in line. In the 1970s, price controls on

gasoline resulted in long lines at the gas station pumps. 64 People couldhave been working or enjoying leisure time, but instead, they wasted many

hours sitting in their cars. For this reason, queuing is often socially

wasteful.

Allocation mechanisms other than price and queuing are available.

For example, when goods cannot be rationed by price due to effective price

gouging laws, some sellers may decide to sell the goods at the regulated

price to friends and family rather than to any willing customer. A shortage,

by definition, means that more people want the good than is available. It

would be understandable for a merchant to prefer to sell his ice to his

friends and neighbors rather than to complete strangers. In fact, it would

not be surprising for the merchant to be subject to social disapprobation if

he did not. As with queuing, however, unless the merchants friends and

neighbors also happen to be the most willing to pay, allocative inefficiency

will exist. Furthermore, people with political power may persuade

merchants to sell goods to them at the regulated price in exchange for

future political favors.65

62 See id.63 See, e.g., John R. Lott Jr. & Sonya D. Jones, Politicians in Need of Economics 101;

Raising Prices at Gas Pumps Before a Fuel Shortage Means Well Pay Less Overall, a Notion

Lost on Officials Outraged by Price Gouging,NEWSDAY, Sept. 6, 2005, at A33. The citation

should be to this article: http://www.aei.org/publications/pubID.23114/pub_detail.asp64 See Rockoff, supra note 40, in THE FORTUNE ENCYCLOPEDIA OF ECONOMICS, supra note

34,at 416, 416-420.65 Even physical attractiveness can be used to allocate resources, as two economists learned

first hand: during World War II, when meat prices were controlled at below market-clearing

prices, their wives extraordinary beauty suddenly began to count more heavily in the butchers

eyes when he decided to which customers to give the amount of meat demanded and which to

disappoint. ARMEN A. ALCHIAN & WILLIAM R. ALLEN, UNIVERSITY ECONOMICS 95 (2nd Ed.


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Of course, allowing prices and willingness to pay to allocate

resources is not a guarantee that perfect efficiency will be obtained. In

some instances, people who truly need a good more than another person

will not be able to bid a high enough price for it. But while not perfect,prices still tend to create the incentives that facilitate crisis response. For

example, in times of crisis society desires buyers to conserve and sellers to

bring more needed goods to the market. A higher price encourages both of

these; keeping prices low encourages the opposite result. Although not

perfect, preventing allocation by price creates incentives that are in direct

opposition to the goal of recovery from a disaster.66

In addition to communicating information to buyers, prices also

provide information to producers.67 Higher ice prices notify sellers to

invest resources in producing ice. For example, the local convenience store

might use a generator to run a freezer rather than keep its store lights on

during the day to make more ice available. Moreover, higher prices also

beckon new sellers, often from distant geographic locations, andcompensates them for venturing into disaster areas.68 Without the higher

price, sellers from other geographic areas would have less information

about the need for ice and less incentive to provide it in the disaster area.

Even for resources that are immobile, such as hotel rooms, higher

prices still provide important incentives, such as encouraging demanders to

conserve on usage. Even if both out-of-area and local sellers did not

respond, higher prices would still improve allocative efficiency by

1968).66 We assume that satisfying peoples needs is one of the goals in the wake of a natural

disaster.

67 See Ehrbar, supra note 35, in THE FORTUNE ENCYCLOPEDIA OF ECONOMICS, supra note34,at 86, 86-87.

68 See id.; John Stossel & Gena Binkley, ABC News: 20/20, Myth: Price-Gouging Is Bad:

Profit Motive Will Ease Scarce Supplies, (ABC television broadcast May 12, 2006), transcript

available athttp://www.abcnews.go.com/2020/print?id=1954352 (after seeing news reports aboutthe disaster caused by hurricane Katrina, John Shepperson, a Kentucky resident, bought 19

generators, rented a U-Haul, and drove 600 miles to Mississippi to sell them. He offered them for

twice the price he paid. As a result, he was arrested for price gouging and spent four days in jail.The police department confiscated Sheppersons generators, ensuring that none of the disaster

victims were able to benefit from them.); They Clapped: Can Price-Gouging Laws Prohibit

Scarcity? By Michael Munger.http://www.econlib.org/library/Columns/y2007/Mungergouging.html (After Hurricane Francis

caused substantial damage to North Carolina communities, more than a million people were

without power. Four young men in the town of Goldsboro, an hour east of Raleigh and largelyuntouched by the storm, noticed that the freezers at the Circle P's, the Stop Marts, and the Handee

Sluggos were brimming with ice. Convenience stores had stocked up, expecting a more easterlycourse for the storm. Now, there was an ice surplus in Goldsboro, and a shortage in Raleigh.These young men rented two small freezer trucks, paid $1.70 each for 500 bags of ice for each

truck and set off. They used chain saws to cut through the many trees blocking the roads, and

attempted to sell ice to needy citizens. When police learned that the ice was sold for more thanwas allowed, the two men were arrested and the ice and truck were impounded as evidence.).


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encouraging consumers to temper their use, such as by staying in a

relatives home instead. While building hotels is obviously not possible in

a matter of days, transporting mobile trailers into the area, for example, can

meet a need for short-term housing. Higher prices encourage flexibility onthe part of consumers in how their needs will be met and innovation on the

part of entrepreneurs in how to meet these needs.

Prices provide many important signals to sellers to increase

production, to entrepreneurs to transport resources to needy people, and to

innovators to discover new ways of meeting peoples needs. The price

system economizes on the amount of information that people need to know.

It does not matter why prices rose; alert entrepreneurs need only see the

higher price to be motivated. One potential benefit to prices is that they do

not require altruistic motives or a centrally planned response to achieve

allocative efficiency. People respond in their own self-interest to earn

profits and in doing so, they simultaneously meet the needs of consumers.

Admittedly, static models of supply and demand may not closelyreflect the reality of a disaster environment. Two points, however, should

be kept in mind. First, the static models of neoclassical economics identify

the underlying market forces when other things are held constant. When

other things are not held constant, the underlying forces previously

identified are still at work, but due to other factors affecting the outcome,

the forces are perhaps not as easily identified. Second, when economists

have taken a more dynamic view of the market economy, their models have

shown that the roles of prices and entrepreneurship are even more

important than in static neoclassical models.69 The entrepreneurial

response to price changes drives the process by which mutually beneficial

exchanges occur in the market.70 Flexible prices not only disseminate

information; they also lead people to discover new information about profit

opportunities.71 Higher prices spur entrepreneurial efforts into finding new

and better ways to satisfy disaster-related needs.72 Anti-gouging laws

remove the forces that disseminate information, failing both to create

socially beneficial incentives for resource conservation and to encourage

entrepreneurial innovation.

Efficiency is important because it means that people are getting the

most from the limited resources they have. Prices are important because

they create incentives for self-interested people to participate in socially

beneficial activities, such as bringing ice from out of town.

69

See contributions from the Austrian School of Economics, such as I SRAEL KIRZNER,COMPETITION AND ENTREPRENEURSHIP (The University of Chicago Press, 1973).

70 ISRAEL M. KIRZNER, THE PERILS OF REGULATION: A MARKET-PROCESS APPROACH 9

(1979).71 Id.72 Id.


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III. SURVEY OF STATE PRICE GOUGING LAWS

Despite the negative effects on efficiency, thirty-two states have

enacted legislation aimed at prohibiting or mitigating price gouging in the

wake of a disaster.73 The aspects of these laws vary greatly from state to

state. The following subsections will discuss eight key characteristics of

these laws and then will also analyze their effectiveness in restraining post-

disaster prices.74

A. Allowable Price Increase

The variation in permissible post-disaster price increases varies

from state to state. Other law reviews have primarily focused on thisimportant distinction.75 Under percentage increase cap laws, sellers may

increase their price after the triggering event by a stated percentage ranging

from ten to twenty-five percent above pre-disaster price.76 Laws deploying

an unconscionable increase bar preclude sellers from making price

increases that are grossly disparate from pre-disaster prices.77 Finally,

complete bar laws restrict all post-disaster price increases.78

By preventing prices from changing at all, complete bar laws

restrict the most trade and thus result in the most inefficiency of the three

options.79 The inability of sellers to raise prices above pre-disaster levels at

73 See Table Summarizing State Price Gouging Laws, infra Part III.i. These thirty-two statesinclude the District of Columbia, which will be referred to as a state throughout this comment,

for simplicity. We do not analyze price controlling laws based on price unconscionability; our

focus is solely on those laws which are triggered by a disaster. See e.g. MCL 445.903(1)(2)74 As the reader shall discover, because we view these price controls as detrimental, we will

attack the mosteffective laws, as opposed to the poorly constructed. Poorly written laws allow

some flexibility, and in our view this is preferable due to the negative effects of price gouging

laws, as opposed to theft or murder laws.75 See Rapp, supra note 16, at 543; Michael Brewer, Note, Planning Disaster: Price Gouging

Statutes and the Shortages They Create, 72 BROOK. L. REV. 1101, 1114 (following Rapps

example in using three primary categories of price gouging laws).76 See Table Summarizing State Price Gouging Laws, infra Part III.i. We include in this

category those laws that forbid unconscionable increases, but then include a percentage

increase which represents prima facie evidence of unconscionability. These states are Kansas,

Maine, and Pennsylvania. See infra notes 139, 142 and 150. Due to the low percentage allowed,

the percentage will likely be the only relevant amount.77 See Table Summarizing State Price Gouging Laws, infra Part III.i. We will assume that in

practice an unconscionable increase and a grossly disparate price will effectively be the

same, as a high price is a high price.78 See Table Summarizing State Price Gouging Laws, infra Part III.i.79 Seesupra Part II.


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all creates no incentive for local sellers to risk operation in potentially

dangerous and unstable markets. Out-of-market sellers, by definition,

previously found it unprofitable to conduct business in the disaster area.

With the increased costs of transportation and dangers caused by disasters,a fully enforceable, complete bar on price increases will ensure that no

additional sellers can profitably bring needed goods into the disaster area

from outside the market.80

The percentage increase cap and the unconscionable increase bar

laws both allow for some price increase, though likely not enough to

sufficiently entice sellers to trade.81 The percentage increase caps allow

only small percentage increases, which are often insufficient in disaster

conditions, based on the amount prices actually increased in several price

gouging claims.82 The clarity provided, however, is superior to the

ambiguity caused by the unconscionable increase bar laws.83 Sellers

under the latter laws will have difficulty forming expectations about legally

permissible prices.84 As a result, some may forego selling an item thatwould not have violated the law or may mistakenly choose to sell a good

that they believed would not violate the law and face prosecution. Given

the extensive fines for price gouging, a seller faced with the prospect of

either making some profits or paying a large fine will often withhold his

goods completely.85 Accordingly, ambiguity in the laws will tend to

restrict sales, as sellers tend toward playing it safe.

80 Of course, the Red Cross, FEMA, and potentially many others will bring goods to disaster

victims out of charity. Additionally, some sellers may, out of some charitable motive, bring in

goods and only request their actual costs in return. But these endeavors are charitable, andcharitable motives must be relied on for them.

81 See Brewer, supra note 75, at 1114. This will depend on the increase allowed under the

law and the amount the market clearing price has increased. Logically, if the laws are effective in

holding prices below the market clearing level, an inefficiently low level of trade will result.82 See e.g., Page, supra note 14, at 50-51 (containing six examples of price gouging

prosecutions, in each of which the market clearing price charged exceeded the previous price by

more than even the highest allowed percentage increase of 25%; in many cases the market price

had risen by more than 100%).83 See id. at 50 (stating that these laws result in a subjective element for the investigators.

Whether a charge is filed will often depend on whether the individual enforcement official finds

that a gross disparity exists.).84 See id.85 See e.g., Scott Barancik, Gouging Gets a Bad Rap, Economists Argue, ST. PETERSBURG

TIMES, July 30, 2004, at D1 (Paul Davis Restoration, a Clearwater company that specializes in

post-disaster renovation, chose not to bid on hurricane projects. Expenses would be double ortriple normal levels, sales associate Jeff Norris said, and would require the company to charge

much higher prices than usual. Customers might mistake it for gouging. We're easy targets out

there, Norris said. You get these little old ladies out on Channel 8 (news) saying, That

contractor, he gouged me. What she neglects to say is that her house was under two feet of water

and we saved her butt.).


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B. Determining Pre-Disaster Prices

Price gouging laws are based on a comparison of pre- and post-

disaster prices, therefore requiring identification of the pre-disaster price.All state laws include a triggering event that activates the price control,

which is generally a declaration of a disaster by an appropriate body, but

they utilize different time periods to measure the pre-disaster price. States

must choose between two possible aspects of prices to determine official

pre-disaster prices: market price versus an individual sellers actual price,

and price at the time of the declaration of disaster versus an average of

historical prices, which is usually a period of thirty days.86

Using an individual sellers actual price to determine the pre-

disaster price facilitates price changes in two ways. First, it gives the seller

unambiguous information; they will understand exactly how much they can

increase prices before violating the law.87 Second, the seller has an

opportunity to increase prices after the disaster but before the declaration ofdisaster, so that they can manipulate their pre-declaration price with

certainty.88 Unfortunately, this window creates an incentive to raise prices,

even above an efficient level, to avoid being locked in at a lower price.89

While beneficially allowing some price flexibility, these laws often do so

by detrimentally encouraging sellers to over-inflate prices initially.

Comparison with price at the time of declaration will frustrate the

effectiveness of price controls more so than comparison to a window of

historical prices.90 The latter precludes sellers from inflating their price

before the declaration, as discussed above.91 Accordingly, laws that

determine the official pre-disaster price as of the time of the declaration

will allow greater price flexibility post-disaster.

C. Covered Goods and Services

Price gouging laws vary with respect to the types of goods and

services covered. The most restrictive laws apply to price increases on all

86 See Table Summarizing State Price Gouging Laws, infra Part III.i. In the market price

category we include several laws that refer to the actual sellers price in the ordinary course of

business. E.g., N.J. STAT. ANN. 56:8-108 (West Supp. 2007) ([P]rice at which the consumer

good or service was sold or offered for sale by the seller in the usual course of business

immediately prior to the state of emergency . . . .). This usual course of business requirement

will make the sellers pre-disaster price the same as a market price.87 See Page, supra note 14, at 51.88 See id; Rapp, supra note 16, at 544.89 See Brewer, supra note 75, at 1114; Rapp, supra note 16, at 544.90 See Brewer, supra note 75, at 1114; Rapp, supra note 16, at 544.91 See Brewer, supra note 75, at 1114; Rapp, supra note 16, at 544.


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goods.92 Most laws apply to the goods and services that will be the most

necessary after a disaster strikes, though they describe the goods covered in

varying degrees of specificity. Some laws cover disaster goods, which

those consumers will need as a direct result of the disaster; they list specificitems, such as immediate and long-term emergency cleanup and

reconstruction in addition to necessities such as food, medication, and

housing.93 Some laws focus on health and safety goods, which are those

needed to protect peoples health, safety, and welfare.94 A similar category

of laws cover only necessities, and they list several much needed items.95

Finally, a few laws only apply to the items listed in the statute, which is

often a list of a few necessities, but some laws cover only one item.96

When price gouging laws regulate fewer goods, sellers have greater

flexibility in responding to market factors in setting price. Legislatures,

however, construct laws to specifically control price in the post disaster-

context.97 The laws that cover fewer goods generally control prices on

those goods that are likely to be in the scarcest supply. After a disaster,demand for uncontrolled luxury goods is likely to decrease anyway; so, the

practical effect of the goods covered should be similar for most laws in that

they will cover the same basic essentials that are most likely to in lowest

supply.

92 See Table Summarizing State Price Gouging Laws, infra Part III.i.; e.g., Natural Disaster

Consumer Protection Act, D.C. CODE 28-4101(a) (2007) ([F]or any merchandise or service . . ..).

93 See Table Summarizing State Price Gouging Laws, infra Part III.i.; e.g. ARK. CODE ANN.

4-88-303(a)(1), (b)(1) (2001) ([T]o sell any consumer food items or goods, goods or services

used for emergency cleanup, emergency supplies, medical supplies, home heating oil, building

materials, housing, transportation, freight, and storage services, or gasoline or other motor fuels . .

. any repair or reconstruction services or any services used in emergency cleanup. . . .).94 See Table Summarizing State Price Gouging Laws, infra Part III.i.; e.g. GA. CODE ANN.

10-1-393.4(a) (Supp, 1997) ([T]o sell or offer to sell at retail any goods or services necessary to

preserve, protect, or sustain the life, health, or safety of persons or their property . . . .).95 See Table Summarizing State Price Gouging Laws, infra Part III.i.; e.g. TEX. BUS. & COM.

CODE ANN. 17.46(27)(A) (Vernon 2002 & Supp. 2007) ([S]elling or leasing fuel, food,

medicine, or another necessity . . . .).96 See Table Summarizing State Price Gouging Laws, infra Part III.i.; e.g. IDAHO CODE ANN.

48-603(19) (2003 & Supp. 2007) ([B]y selling or offering to sell to the ultimate consumer fuel

or food, pharmaceuticals, or water for human consumption . . . .).97 See Table Summarizing State Price Gouging Laws, infra Part III.i.; e.g., W.VA. CODE

46A-6J-1 (2007) (It is the intent of the Legislature in enacting this article to protect the public

form excessive and unjustified increases in prices charged during or shortly after a declared state

of emergency . . . Further, it is the intent of the legislature that this article be liberally construed

so that its beneficial purposes may be served.).


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D. Exception for Increased Costs

The majority of price gouging laws include an exception for price

increases that reflect the sellers actual increase in costs.98

A few statespermit sellers to pass on the increase in their expenses in addition to their

customary mark-up over those costs.99 Several states, however, allow for no

exception at all, forbidding price increases even if the costs to the seller

have increased dramatically.100

Allowing sellers to pass on increased costs will enable more trade in

post-disaster environments, but even these laws still inhibit sales.101 First,

the financial costs do not account for the sellers opportunity costs, which

is their next best alternative use of the resource. 102 A potential seller of

generators, like John Charles and John Tate Mikell, will forego many other

opportunities when they choose to venture into a disaster area. Before a

seller will embark on this venture, he must believe that his expected profit

outweighs the dangers, including risk of loss in the disaster area, risk thatbuyers will not pay the higher price he asks, and so on. These opportunity

costs cannot be evidenced by receipts; a seller will not be able to include

them in her exception as actual increased costs. Consequently, the seller

will not be able to charge more to compensate these costs under the

exceptions granted by the price gouging laws.

Therefore, assuming we want to create a sufficient incentive to compel

out-of-market sellers to bring needed goods into disaster areas,103 laws must

98 See Table Summarizing State Price Gouging Laws, infra Part III.i.; e.g., IND. CODE ANN.

4-6-9.1-2 (West Supp. 2007) (Price gouging occurs if: . . . the increase in the amount charged is

not attributable to cost factors to the retailer, including replacement costs, taxes, and

transportation costs incurred by the retailer.).99 See Table Summarizing State Price Gouging Laws, infra Part III.i.; e.g., CAL. PENAL CODE

396 (West 1999 & Supp. 2007) ([A] greater price increase is not unlawful if that person can

prove that the increase in price was directly attributable to additional costs imposed on it by the

supplier of the goods, or directly attributable to additional costs for labor or materials used to

provide the services . . . plus the markup customarily applied by the seller for that good or service

in the usual course of business.).100 See Table Summarizing State Price Gouging Laws, infra Part III.i.101 See Brewer, supra note 75, at 1115. As costs dramatically increase the relative percent of

profit earned under the pre-disaster price falls. This relatively little profit will not likely induce

sellers away from other opportunities. See supra Part II.102 See JAMES M. BUCHANAN, COST AND CHOICE: AN INQUIRY IN ECONOMIC THEORY 41

(Liberty Fund, Inc. 1999) (1969) (Cost is that which the decision-taker sacrifices or gives up

when he makes a choice.).103 Given FEMAs demonstrated gross inability to deliver needed goods to starving people, we

believe states should craft laws to create as many incentives as possible to induce sellers to bringin needed goods. See Mimi Hall, FEMA Official: Brown Ignored Superdome Warnings, USA

TODAY, Oct. 20, 2005, at A1, A5, available athttp://www.usatoday.com/news/washington/2005-

10-20-katrina-FEMA_x.htm (Sir, I know that you know the situation is past critical, [Marty

Bahamonde, FEMAa only official in New Orleans when Katrina hit] wrote to Brown on Aug.

31, two days after the storm hit. Here are some things you might not know: hotels are kicking


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not only compensate sellers for money costs but also for their opportunity

costs.104 No legislature, however, can know a sellers opportunity costs:105

the subjective value of what a person has forgone by deciding to engage in

another endeavor. Given that the opportunity costs of individual sellers areunknowable, we should allow prices to increase to account for them so that

more sellers will enter the market. The best scenario would be to err on the

side of too many sellers flooding the market with emergency supplies,

rather than restricting sellers and ending up with too few supplies.

E. Sellers Covered

The most restrictive price gouging laws apply to all sellers

throughout the distribution chain, including non-merchant sellers.106 These

laws restrict price increases most, preventing secondary markets from

forming legally.107 Because of the necessity of price increases, these lawswill have the most detrimental effect because they restrict price increases

the most. In such a regime, the negative effects of price setting will include

queues, black markets, and less efficient sellers.108 These increased costs

and loss of efficiency would further stymie recovery.

Some laws specifically apply to merchants, which are those sellers

who are in the regular trade of selling the goods. 109 These laws allow for

secondary markets to develop as the limited goods are purchased by

individuals who can then resell them for their market value.110 When prices

are held below equilibrium levels but secondary sellers can sell for higher

prices, entrepreneurs will likely arbitrage the markets by purchasing goods

where prices are controlled and selling where they are not. Given this

people out, thousands gathering in the street with no food or water. He went on to say that some

dying patients were being taken out on medical helicopters. But estimates are many will die

within hours.).104 Seesupra note 102, at 41.105 The purpose of the market is to compensate a seller for his opportunity costs; thus, to

inhibit prices from rising is to allocate relief resources away from the most needed location, the

disaster area, and to another. Seesupra Part II.106 See Table Summarizing State Price Gouging Laws, infra Part III.i.; e.g., N.C. GEN. STAT.

75-38(a) (2005) ([A]ny person who sells or offers for sale . . . .).107 By secondary markets we refer to legalsecondary markets; where the demand for a good

exists, black markets will arise. See supra note 57, and accompanying text.108 Id.109 See Table Summarizing State Price Gouging Laws, infra Part III.i.; e.g., Price Controls

During Emergencies Act, UTAH CODE ANN. 13-41-201(1) (2005) ([A] person may not chargea consumer an excessive price for goods or services sold or provided at retail . . . .).110 These markets will be more efficient than illegal black markets only because black markets

carry an increased cost to offset criminal punishment. See generally RICHARD A. POSNER,

ECONOMIC ANALYSIS OF LAW 219-227 (7th ed. 2007) (explaining the application of the Hand

Formula to criminal law sanctions).


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likelihood of secondary markets operating, which ultimately lead to goods

selling at the market price, it is more desirable that the regular merchants

be able to increase their prices.111 Many final consumers will likely pay the

same, market-clearing price, but society will use fewer resources byallowing the lower-cost merchant to function.112

A handful of laws apply only to retail sellers, excluding wholesalers

and other sellers further up the distribution chain.113 These laws only

preclude price increases in sales made to the end user, so wholesalers and

suppliers could increase their prices for sale to the retail stores, who will

pass on the increase to the consumer.114 Though these laws will allow the

benefits from increased prices, they will do so less efficiently than if the

retailers themselves were to raise prices.

F. Activation

The mechanisms that activate most price gouging laws cause them

to come into effect more often than even their proponents may desire.

Twenty-six states price gouging laws automatically regulate prices upon a

declaration of disaster.115 This declaration can come from the governor of

the state, or often a local official, or even the President.116 Six states take a

more beneficial approach that requires the governor or a local official to

make an independent determination to institute price controls.117 These

laws require an additional step to enact the price control, instead of them

111 See supra Part II.

112 The St. Petersburg Times in Florida reports that after Hurricane Wilma in 2005, instantentrepreneurs in Little Haiti flouted anti-gouging laws and sold gasoline on the side of the street

in empty buckets, milk bottles, and even pickle jars. Abhi Raghunathan, South Florida Shortages

Fuel Black Market, ST. PETERSBURG TIMES, Oct. 29, 2005, at 4B. Merchants have already paid

many of the costs of doing business, such as purchasing registers, hiring employees, streamlining

operations, etc., so they can sell cheaper than fly-by-night, black-market vendors.113 See Table Summarizing State Price Gouging Laws, infra Part III.i.; e.g., IDAHO CODE

ANN. 48-603(19) (2003 & Supp. 2007) ([S]elling or offering to sell to the ultimate consumer .

. . .).114 See Sean P. Lafferty, Consumer Protection; EmergenciesProtection Against Price

Gouging, 26 PAC L.J. 215, 218 (1995).115 See Table Summarizing State Price Gouging Laws, infra Part III.i.; e.g., FLA. STAT.

501.160(2) (2007) (Upon a declaration of a state of emergency by the Governor it is unlawful . .

. .).116 Almost uniformly a declaration of disaster or emergency by a local official or the governor

will trigger the laws. See infra notes 125-156 and accompanying text. Most laws also triggerupon a presidential declaration, but not all. See id.117 See Table Summarizing State Price Gouging Laws, infra Part III.i.; e.g., CONN. GEN.

STAT. 42-231(a) (Upon declaration of an emergency, the Governor may in connection

therewith issue orders designating a product or service to be in short supply or in danger of

becoming in short supply . . . and imposing price restrictions or rationing with respect thereto.).


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taking effect based solely on the decision to declare a disaster. This

additional step to enact the price control is important because state and

local governments often decide to declare a disaster for reasons unrelated to

shortage of supply.118

For instance, mutual aid agreements create an incentive for local

officials to make a declaration of disaster.119 A disaster often disrupts

regular local government services and stretches the resources of cities and

counties to their limits.120 Virtually every state grants authority to

municipalities to enter into these agreements, which facilitate unaffected

municipalities in sending help in the form of equipment, supplies,

information, technology, and personnel.121 Because of these agreements, as

a practical matter, a city or countys need for assistance after a disaster will

require them to make an official disaster declaration.122 This declaration

will bring needed assistance and manpower to help in the rescue and clean

up effort. Unfortunately, it will also often cause price restrictions to

automatically take effect, whether or not those making the declarationdesired or even considered such a consequence.

Since local resources are sparse after a disaster, many municipalities

and states will rely on federal funding to assist them in recovery and

rebuilding.123 A declaration of disaster by the governor of the state must

precede assistance from the federal government.124 The governor then

requests that the President issue a declaration of either a major disaster or

a lesser declaration.125 After this Presidential declaration, federal funding

and assistance will be made available.126 The strong incentives for state

and local officials to declare a disaster, which are wholly unrelated to the

desire to enact price controls, result in overuse of price controls, even by

their proponents standards.

118 See generally Thomas A. Garrett & Russell S. Sobel, The Political Economy of FEMA

Disaster Payments, 41 ECON. INQUIRY 496, 496-509 (2003) (We find that presidential and

congressional influences affect the rate of disaster declaration and the allocation of FEMA

disaster expenditures across states. States politically important to the President have a higher rate

of disaster declaration by the President, and disaster expenditures are higher in states having

congressional representation on FEMA oversight committees.).119 See Howard D. Swanson, The Delicate Art of Practicing Municipal Law Under Conditions

of Hell and High Water, 76 N.D. L. REV. 487, 497 (2000); Joseph G. Jarret & Michele L.

Lieberman, When the Wind Blows: The Role of the Local Government Attorney Before, During,

and in the Aftermath of a Disaster, 36 STETSON L. REV. 293, 317-321 (2007).120 See Swanson, supra note 119, at 497.121 See id.122 See id.123

See id.124 See id. at 497-98.125 See id. (In the event of the President declaring an area as a major disaster area, a

combined effort of local, state, and federal assistance will come into play. . . . [this is] the greatest

federal response and participation possible.).126 See Swanson, supra note 119, at 497-98.


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G. Duration

Once price gouging laws have been activated, they stay in effect for

varying lengths of time. Most states align the duration of price controls tothe length of the declaration of disaster.127 Alternatively, some states set a

given period that the price controls will stay in effect after activation that is

unrelated to the length of the declaration.128 The remaining states blend the

two approaches in setting the duration of their price controls; some grant a

buffer of some number of days after the declared state of disaster ends,129

while others provide alternatives for the end of price controls, which could

be either the end of the declaration of disaster or a set number of days.130

The least restrictive approach includes the shortest time period of

price controls and the least ambiguous length. However, even in a clearly

defined, relatively short period, such as thirty days from the declaration, the

end of the controls will result in an expected jump in the price of long-term

recovery supplies, such as lumber. As such, the present price is relativelylower than the price after the control period ends. Therefore, consumers

will demand more goods now, when resources are likely to be scarcest and

conservation is necessary, rather than pay market prices later.131 This

situation will further delay recovery.

The duration of the laws price controls will have a major effect on

an areas ability to begin the long-term recovery process. The sooner the

price is allowed to rise to the market level, the sooner the region will see

the beneficial effects that price produces, such as goods being brought into

the region from afar.132 Laws with ambiguous durations, such as those with

renewable periods,133 distort prices even further. The inevitable future rise

in price will confound the shortage and may lead officials to continue

127 See Table Summarizing State Price Gouging Laws, infra Part III.i.; e.g., GA. CODE ANN.

10-1-393.4(a) (Supp, 1997) (It shall be unlawful . . . in any area in which a state of emergency . .

. has been declared, for as long as such a state of emergency exists, to sell, or offer for sale . . . .).128 See Table Summarizing State Price Gouging Laws, infra Part III.i.; e.g., Illinois

Emergency Services and Disaster Agency Act of 1988, 20 ILL. COMP. STAT. 3305/7 (2007)

([U]pon such proclamation, the Governor shall have and may exercise for a period not to exceed

30 days the following emergency powers . . . .).129 See Table Summarizing State Price Gouging Laws, infra Part III.i.130 See Table Summarizing State Price Gouging Laws, infra Part III.i.131 Seesupra note 57, and accompanying text.132 The low price fails to create incentives for out of region sellers to do this. Seesupra Part

II.133 See Table Summarizing State Price Gouging Laws, infra Part III.i.; e.g., ARK. CODE ANN.

4-88-303(c) (2001) (The provisions of this section may be extended for additional thirty-day

periods by a local governing body or the General Assembly if deemed necessary to . . .); but see

D.C. CODE ANN. 28-4102(b)(1) (LexisNexis 2001) ([T]he Mayor may declare, for not more

than 30 calendar days, a state of emergency for the purposes of this act.).


22/42



extending the controls, creating greater shortages.134

H. Penalties

Several states make violation of price gouging laws a criminal

offense, subjecting violators to potential jail time.135 The great majority of

states use civil fines to deter gougers. These fines can be substantial,

ranging up to tens of thousands of dollars.136 Presumably, states design

fines to deter sellers from price gouging. As other law reviews have done,

we assume that all penalties will deter most established sellers from

violating the statutes.137 Sellers that do violate price gouging laws face

huge penalties, making the least sophisticated and most obscure businesses

more likely to engage in the practice. This will slow recovery by stopping

sales by more efficient sellers and increasing the percentage of sales by the

least efficient sellers.138 In Part V, we further discuss the effect thesepenalties have on the mix of sellers in the post-disaster market.

134 Since these laws are put in place to combat supply shortages but actually create shortages,

any law that can be renewed in this way has the potential to have a domino effect, where

continued renewals lead to continued shortages, and so on.135 See Table Summarizing State Price Gouging Laws, infra Part III.i.136 See Table Summarizing State Price Gouging Laws, infra Part III.i. A Days Inn Airport in

West Palm Beach forced three customers to pay sixty or seventy dollars over the billboardadvertised price of fifty dollars. They settled their law suit for $70,000. Page, supra note 14, at

50.137 See Brewer, supra note 75, at 1116 (stating that the severity of penalties and states

willingness to enforce the laws ensures that merchants will comply); Tom Fink, Price Gougers

Beware: We Will Arrest You, THE CLAREMORE DAILY PROGRESS, Dec. 14, 2007,

http://www.claremoreprogress.com/business/local_ story_348165342.html ([A]nother form ofpotential looting still exists in the form of price gouging. . . . Police Chief Mickey Perry [said],

[w]e understand some people may be willing to pay more for something thats in short supplyright now, . . . [but a]nyone found gouging their prices during this time will be arrested.).138 Examples of inefficient sellers operating after disasters do exist, even under conditions of

price gouging. Examples include: John Charles and John Tate Mikell selling generators on a

roadside out of their horse trailer, see infra Part I., also instant entrepreneurs selling gas out ofpickle jars, see Raghunathan, supra note 112.


23/42

257

TableSumma

rizingStatePriceGougingLaws

State

Allow-

able

Price

Increase

DeterminingPre-

DisasterPrice

Covered

Good

sand

Serv

ices

Except.for

Increasein

Costs

Sellers

Covered

Activation

Duration,

Penalties

Afforded1

Alabama2

25%

30DaysPrior,

MarketPrice

A

ll

Actual

Costs

AnyPerson

Automaticon

Declaration

During

Declaration

C

ivil,

$2

5,000

Arkansas3

10%

AtDeclaration,

SellersPrice

Disa

ster

Goods

Mark-Up

AnyPerson

Automaticon

Declaration

During

Declaration,

Renewable

M

isd,

$1,000

California4

10%

AtDeclaration,

SellersPrice

Disa

ster

Goods

Mark-Up

AnyPerson

Automaticon

Declaration

During

Declaration,

Plus30-180

Days5

M

isd,

$1

0,000

Colorado6

1

0%

30DaysPrior,

SellersPrice

Medication

Actual

Costs

All

Merchants

Separate

Determination

During

Declaration

C

ivil

1

Thepenaltieslistedareonlythosethatthespecificpricegouginglaw

scontain.Manystatesaffordadditionalor

alternativepenaltiesthatarecontainedelsewhereinthe

ConsumerProtectionlaws.Afu

rthersearchofallconsumerprotectionpenaltie

sisbeyondthescopeofthispaper.

2

AlabamaUnconscionable

PricingAct,ALA.CODE8-31-1to-6(2002).

3

ARK.CODEANN.4-88

-301to-305(2001).

4

CAL.PENALCODE396

(West1999&Supp.2007).

5

The180daydurationappliesonlytorepair,reconstruction,anddisasterc

leanupservices.

Id.

6

COLO.REV.STAT.ANN.6-1-714(West2007).


24/42

258

State

Allow-

able

Price

Increase

DeterminingPre-

DisasterPrice

Covered

Good

sand

Serv

ices

Except.for

Increasein

Costs

Sellers

Covered

Activation

Duration,

Penalties

Afforded

1

Connecticut7

B

ar

AtDeclaration,

MarketPrice8

Healthand

safety

goods

Actual

Costs

AnyPerson

Separate

Determination

90Days

Maximum

M

isd,

$1

0,000

D.C.9

10%

90DaysPrior,

MarketPrice

A

ll

Actual

Costs

AnyPerson

Automaticon

Declaration

30Days

Maximum

C

ivil,

$1

,000

Florida

10

Un

cons

B

ar

30DaysPrior,

MarketPrice

Disa

ster

Goods

Actual

Costs

AnyPerson

Automaticon

Declaration

60Days,

Renewable

C

ivil,

$2

4,000

Georgia11

Total

B

ar

AtDeclaration,

SellersPrice

Healthand

Safety

Goods

Actual

Costs

AnyPerson

Automaticon

Declaration

During

Declaration

C

ivil,

$1

0,000

Hawaii12

Total

B

ar

AtDeclaration,

SellersPrice

A

ll

Actual

Costs

All

Merchants

Automaticon

Declaration

During

Declaration

C

ivil,

$1

,000

Idaho

13

Un

cons

B

ar

AtDeclaration,

SellersPrice

Lis

ted

Necessities

Actual

Costs

Only

Retailers

Automaticon

Declaration

During

Declaration

C

ivil

7

CONN.GEN.STAT.42-231to-233(West2007);CONN.GEN.STAT.

29-319(West2007).

8

Connecticutspre-disasterpriceisbasedonthesellersprice,notmarketprice.However,acaveatthatitmustbethesellerspriceintheusualcourseofbusiness

islikelyto

effectivelybasethedeterminatio

nonthemarketprice,asasellerssuddenlyincreasedpre-disasterpriceisnothispriceinthe

ordinarycourseofbusiness.Id.42-232.

9

NaturalDisasterConsumerProtectionAct,D.C.CODE28-4101to-41

03(2007).

10

FLA.STAT.501.160(20

07).

11

GA.CODEANN.10-1-393.4(Supp,1997).

12

HAW.REV.STAT,209-9(2001).

13

IDAHOCODEANN.48-6

03(2003&Supp.2007).


25/42

259

State

Allow-

able

Price

Increase

DeterminingPre-

DisasterPrice

Covered

Good

sand

Serv

ices

Except.for

Increasein

Costs

Sellers

Covered

Activation

Duration,

Penalties

Afforded1

Illinois14

May

Set15

NA153

Any

153

MaySet

153

AnyPerson

Separate

Determination

30Days

Maximum

C

ivil

Indiana16

Un

cons

B

ar

7DaysPrior,

MarketPrice

Fu

el

Actual

Costs

AnyPerson

Automaticon

Declaration

During

Declaration

C

ivil

Iowa17

Un

cons

B

ar

AtDeclaration,

MarketPrice

Disa

ster

Goods

Actual

Costs

AnyPerson

Automaticon

Declaration

During

Declaration,6

Month

Maximum

C

ivil

Kansas18

Uncons,

Barat

25

%19

AtDeclaration,

MarketPrice

Disa

ster

Goods

Actual

Costs

All

Merchants

Automaticon

Declaration

30Days

Maximum

C

ivil

14

IllinoisEmergencyServic

esandDisasterAgencyActof1988,20ILL.COMP.STAT.3305/7(2007).

15

Illinoispricegouginglawisfairlyuniqueinthatitgiveswidelatitude

fortheGovernortoimposepricecontrols.Afterthedeclarationofdisaster,theGovernormaychoseto

prohibitincreaseinpricebeyond

anylevelforanygoodorservice,andmayals

oinstitutequotas.Id.

16

IND.CODEANN.4-6-9

.1-1to-7(WestSupp.2007).

17

IOWAADMIN.CODE61-31.1(714)(2007).Pre-disasterpriceisbasedo

nthesellerspriceintheordinarycourseofbusiness,asdiscussedinnote129.

18

KAN.STAT.ANN.50-6,

106(2005).

19

Kansasslawisahybrid

UnconscionableIncreasebarandPercent

Increasebar.Itproscribesunconscionableincreasesinprice,butmakesa25%

increaseprimafacie

evidencethattheincreaseisunc

onscionable.

Id.


26/42

260

State

Allow-

able

Price

Inc

rease

DeterminingPre-

DisasterPrice

Covered

Good

sand

Serv

ices

Except.for

Increasein

Costs

Sellers

Covered

Activation

Duration,

Penalties

Afforded

1

Kentucky

20

Un

cons

B

ar

AtDeclaration,

SellersPrice

Disa

ster

Goods

Actual

Costs

AnyPerson

Automaticon

Declaration

During

Declaration,

Renewable

C

ivil,

$1

0,000

Louisiana

21

Total

B

ar

AtDeclaration,

MarketPrice

A

ll

Actual

Costs

AnyPerson

Automaticon

Declaration

During

Declaration

C

ivil

Maine

22

Uncons,

Barat

15

%23

AtDeclaration,

SellersPrice

Necessities

Mark-Up

AnyPerson

Separate

Determination

60Days

Maximum

C

ivil

Mass.

24

Un

cons

B

ar

AtDeclaration,

MarketPrice

Fu

el

Actual

Costs

All

Merchants

Separate

Determination

During

Declaration,

Plus30Days

C

ivil

Mississippi25

Total

B

ar

AtDeclaration,

MarketPrice

A

ll

Actual

Costs

AnyPerson

Automaticon

Declaration

During

Declaration

Fe

lony,

$5

,000

20

KY.REV.STAT.ANN.

367.372-.378(LexisNexisSupp.2007).

21

LouisianaEmergencyAssistanceandDisasterAct,LA.REV.STAT.ANN

.29:721-738(2007).

22

ME.REV.STAT.ANN.tit.

10,1105(1997&Supp.2006).

23

Maineslaw

isahybrid

UnconscionableIncreasebarandPercentIncreasebar.Itproscribesunconscionableincreasesinprice,butmakesa25%

increasep

rimafacie

evidencethattheincreaseisunc

onscionable.

Id

.

24

940Mass.CodeRegs.3.1

8(2007).

25

MISS.CODEANN.75-24-25(2000&Supp.2007).


27/42

261

State

Allow-

able

Price

Increase

DeterminingPre-

DisasterPrice

Covered

Good

sand

Serv

ices

Except.for

Increasein

Costs

Sellers

Covered

Activation

Duration,

Penalties

Afforded

1

Missouri

26

Un

cons

B

ar

AtDeclaration,

MarketPrice

Necessities

Mark-Up

AnyPerson

Automaticon

Declaration

During

Declaration

C

ivil

NewJersey

27

10%

AtDeclaration,

MarketPrice28

Healthand

Safety

Goods

Actual

Costs

AnyPerson

Automaticon

Declaration

During

Declaration,

Plus30Days

C

ivil

NewYork

29

Un

cons

B

ar

AtDeclaration,

SellersPrice

Healthand

Safety

Goods

Actual

Costs

AnyPerson

Automaticon

Declaration

During

Declaration

C

ivil

N.Carolina3

0

Un

cons

B

ar

60DaysPrior,

SellersPrice

Healthand

Safety

Goods

Actual

Costs

AnyPerson

Automaticon

Declaration

45Days,

Renewable

C

ivil

Oklahoma3

1

10%

AtDeclaration,

SellersPrice

Disa

ster

Goods

Actual

Costs

AnyPerson

Automaticon

Declaration

During

Declaration,

Plus30Days

C

ivil

26

MO.CODEREGS.ANN.tit.15,60-8.030(2007).

27

N.J.STAT.ANN.56:8-107to-109(WestSupp.2007).

28

Pre-disasterpriceisbased

onthesellerspriceintheordinarycourseofb

usiness,asdiscussedinnote146.

Id

.at56:8-108.

29

N.Y.GEN.BUS.LAW

396-r(McKinney1996).

30

N.C.GEN.STAT.75-37to-38(2005).

31

EmergencyPriceStabilizationAct,OKLA.STAT.tit.15,777.1-777.5(2007).


28/42

262

State

Allow-

able

Price

Increase

DeterminingPre-

DisasterPrice

Covered

Good

sand

Serv

ices

Except.for

Increasein

Costs

Sellers

Covered

Activation

Duration,

Penalties

Aff

orded1

Pennsylvania32

Uncons,

Ba

rat

20

%33

7DaysPrior,

MarketPrice

A

ll

Actual

Costs

AnyPerson

Automaticon

Declaration

During

Declaration,

Plus30Days

C

ivil,

$10,000

S.Carolina34

Uncons

B

ar

30DaysPrior,

MarketPrice35

A

ll

Actual

Costs

AnyPerson

Automaticon

Declaration

Renewable15

DayPer.

M

isd,

$1

,000

Tennessee36

Uncons

B

ar

AtDeclaration,

MarketPrice37

Disa

ster

Goods

Actual

Costs

AnyPerson

Automaticon

Declaration

During

Declaration

C

ivil

Texas38

Uncons

B

ar

AtDeclaration,

MarketPrice

Necessities

None

All

Merchants

Automaticon

Declaration

During

Declaration

C

ivil

32

PriceGougingAct,73PA.STAT.ANN.232.1-.5(WestSupp.2007).

33

PennsylvaniaslawisahybridUnconscionableIncreasebarandPercentIncreasebar.Itproscribesunconscionable

increasesinprice,butmakesa25%increaseprimafacie

evidencethattheincreaseisunconscionable.

Id.

34

S.C.CODEANN.39-5-145(Supp.2006).

35




Id.

36

TennesseePrice-Gouging

Actof2002,TENN.CODEANN.47-18-5101

to-5104(Supp.2007).

37




Id.at47-18-5103.

38

TEX.BUS.&COM.CODE

ANN.17.46(Vernon2002&Supp.2007).


29/42

263

State

Allow-

able

Price

Increase

DeterminingPre-

DisasterPrice

Covered

Good

sand

Serv

ices

Except.for

Increasein

Costs

Sellers

Covered

Activation

Duration,

Penalties

Afforded

1

Utah39

10%or

30%

30DaysPrior,

SellersPrice40

Disa

ster

Goods

Mark-Up

AnyPerson

Automaticon

Declaration

During

Declaration

C

ivil,

$1

0,000

Vermont41

Un

cons

B

ar

AtDeclaration,

MarketPrice

Fu

el

Actual

Costs

All

Merchants

Separate

Determination

30Days,

Renewable

C

ivil

Virginia42

Un

cons

B

ar

10DaysPrior,

MarketPrice43

Disa

ster

Goods

Actual

Costs

All

Merchants

Automaticon

Declaration

30Days,

Renewable

C

ivil

W.Virginia44

10%

10thDayBefore,

SellersPrice

Disa

ster

Goods

Actual

Costs

AnyPerson

Automaticon

Declaration

Longerof

Declarationor

30,or180

Days4

5

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