Price gouging has become a sensitive topic in many states when It comes to natural disasters. Price gouging, itself, is the act of charging prices that are higher than the fair market value for a temporary period. Typically, this takes place during natural disasters, when there is an increase in demand for a good and/or service. Higher prices incentivize suppliers to supply more product to fulfill the demands. This effort to go out of the typical supply chain to find resources, puts higher costs on the supplier and sometimes even higher risks; thus, making it imperative for the retailers to desire to charge a greater price for a good. When states place a regulation on price gouging, it halts suppliers from putting in the extra effort to find other sources to fill the surplus of demand. States are putting a stop on firms taking advantage of consumers during times of disasters. The General Attorney of Florida, Pam Bondi, had to recently highlight what the price gouging regulations are in the state of Florida, as well as provide individuals with a hotline number where they can report price gouging on commodity goods. An individual can enforce the law through estimates, invoices, receipts, and bills.
The Florida statute reads, the following: “Florida Statute 501.160 states that during a state of emergency, it is unlawful to sell, lease, offer to sell, or offer for lease essential commodities, dwelling units, or self-storage facilities for an amount that grossly exceeds the average price for that commodity during the 30 days before the declaration of the state of emergency, unless the seller can justify the price by showing increases in its prices or market trends. Examples of necessary commodities are food, ice, gas, and lumber” (Bondi, 1). Compared to the regulations from other states, Florida does not set a specific price limit that will determine whether a commodity is affected by price gouging. The statute leaves the terms ambiguous by stating that the current prices, after the emergency is announced, in comparison to the average prices of 30 days priors should not show a “gross disparity” (Bondi, 1). This sort of ambiguity puts a sense of discomfort on Florida producers since they are unaware of how much of an increase in prices will cause an uproar with the General Attorney for violating the statute.
During Hurricane Irma, Floridians experienced first-hand retailers utilizing price gouging strategies with their commodities in response to the increase in consumer demands. Producers took advantage of the desperation of consumers during their preparations for the hurricane. Miami-Dade and Monroe county were subjected to inflated prices per gallon at Chevron stations. Individuals realized when they saw that prices were practically double than the average prices that were being seen in Tallahassee and Tampa (Fox News, 5) When Chevron was accused of price gouging their gas, the Attorney General used the complaints received through the hotline to directly call out Chevron for their wrongful doing. In Jupiter, there was a gouging complaint of $72 for one pack of 24 six-ounce water bottles (Fox News, 5). Delta asked for $3,200 on a flight ticket out of Florida (Woodcock, 6). However, since airlines are known for raising up prices as the date of the flight comes closer, this situation did not necessarily fall under the price gouging statute. What it did do was exemplify how airlines abuse their position when they see desperate consumers. Other airlines, such as American Airlines, were offering cheaper flights to aid in getting people out of the danger zone. American Airlines set their one-way ticket prices to $99 out of anywhere of 5 south Florida cities. (Fox News, 5)
The Florida attorney General Pam Bondi took actions to set in place a price-gouging hotline to eliminate the occurrences of price gouging during Hurricane Irma. She stated that Floridians “should not be inhibited by unlawful price increases on supplies necessary to brace for a major hurricane strike.” (Hughes, 3) Her objective was to assist Floridians in getting out of dangers way and going after the companies that are becoming an obstacle for her to do that. When looking at the complete picture of this issue, the statute does not necessarily eliminate extra costs from the consumer due to the tradeoff one has to deal with when suppliers run out of a commodity good and there is a shortage. The individual has to then find a way to fulfill their need by either finding a substitute product, or driving to a remote location to get the product.
The economic effects of a natural disaster begin to present themselves days before the disaster actually takes place. Shown in Graph 1, the Gasoline Market is at equilibrium at P* and Q*. From the moment that there is a forecast of disruptive weather patterns, one can begin to see abnormalities in the behaviors of consumers and suppliers for commodity goods and services. This has a direct effect on the supply and demand curves for such products. Individuals are entering a preparation mode, increasing the demand for different goods especially gasoline, as the gray arrow depicts on the graph. As a result, there will be a shift in the market demand curve, the demand curve shifts right from D to D’. Now the new quantity demanded by consumers is labeled as QD. Specifically, during a hurricane like Hurricane Irma, the gasoline market experience changes as an effect from altering consumer behaviors. As the consumer demand for gas kept increasing, gasoline stations quickly experienced shortages since the quantity demanded, QD eventually surpassed the quantity supplied, Q*. This takes place when the market is no longer at equilibrium, where the price equals the quantity supplied and quantity demanded. There is an increase in quantity demanded in relation to the quantity is available for consumers. In other words, the current price is too low for producers to supply more goods to meet the demands of the consumers. As a result, in an unregulated market there is an upward pressure placed on the price of gasoline in order to bring the market back to equilibrium where all variables are equal. However, with price gouging regulations this pressure on the price has to be ignored since in Florida, along with other states, it becomes illegal to alter prices based on demand. In the graph, one can observe how consumers are demanding an increase in quantity; thus, the quantity demanded passes the quantity supply causing an irregularity in the gasoline market known as a shortage.
The price gouging regulation on the gasoline market during a natural disaster is supposed to prevent any abuse from firms on their consumers. These laws are intended to keep the suppliers unresponsive to the economic pressures, of a shortage, to ensure that the consumers are not taken advantage of. Therefore, when there is a hurricane in the mist, or any other natural disaster, the government does not allow for gas stations to increase their prices. Once the quantity demanded passes the quantity of gas that is supplied to each station, then there is a lack of supply for the given area. Legislators fail to realize that, “limiting price increases in a time of high demand removes the economic incentive that would have motivated other people to bring in an additional supply” (Dorfman, 2).
Price ceiling regulation has close resemblance to the price gouging regulations, as shown in Graph 2 . When the government implements a price ceiling it is setting a price maximum. This does not permit suppliers from making prices any higher than the amount established. A price ceiling regulation can show similar effects that are seen from price gouging regulations. With price gouging laws, state government is essentially applying a price ceiling to the market of a commodity. The law is telling suppliers that it is illegal to charge more than the maximum price that is set for the given good. One minor difference is that price gouging regulations do not necessarily define an amount as a price maximum. Price ceilings define the price maximum being set for an industry while the price gouging regulations sets an indirect price maximum on the market.
A price ceiling implies a change in the total welfare of a given market. There is a change in the producer surplus and the consumer surplus; therefore, effecting the total welfare, as shown from Graph 3 to Graph 4. The unregulated gas market, Graph 3, shows the consumer surplus (CS) and producer surplus (PS) for the gasoline. The equilibrium price and quantity are also depicted in the graph as (Q*, P*). The total welfare of the unregulated market will be the sum of the CS area and the PS area. Now with implementing a price ceiling regulation, Graph 4, one can notice a number of changes in the market for gasoline. There is an increase in consumer surplus (CS); thus, the benefits a consumer receives at that price increase relative to what they actually spend as the market price. Producer surplus (PS) is decreased so producers have less of a benefit for selling their products at the price ceiling. In total, the total welfare is now the sum of the new CS and the new PS. In general, however, total welfare experiences a decrease since a dead weight loss (DWL) triangle appears on the graph. The deadweight loss is “the loss of economic efficiency in terms of utility for consumers and producers such that the optimal or allocative efficiency is not achieved” (The Economic Times, 4). This becomes the additional burden on the economy due to the tradeoff between a price maximum and loss of benefit to producers. Price ceiling is the root of other issues concerning how to ration the goods or services that are available and how to put a market at ease when the equilibrium price of the market is much higher than the market price.