Preventing Price Gouging Promotes Black Markets in Florida I

Preventing Price Gouging Promotes Black Markets in Florida

In many states, including Florida, it is illegal to engage in price gouging. Florida’s law penalizes a seller for any “gross disparity between the quoted price of a ‘necessity item’ such as water, and the item’s price on the date that the governor declares a state of emergency.” The penalties stay in force for 30 days from the date of the declaration. Florida is susceptible to hurricanes and in 2004, three successive hurricanes struck Florida. The demand for “necessities,” such as bottled water, gasoline, and plywood increased significantly since damages to the state’s housing, electrical grid, and businesses were extensive. With prices fixed at prehurricane levels, there was little incentive for producers and others outside the state to rush these items to Florida disaster areas.

(A) Who gains and who loses when antigouging laws contribute to shortages of items such as bottled water or plywood?

Solution

Price gouging is a pejorative situation where sellers set higher price than the fair price. It is a form of exploitation and totally unethical as well as illegal. Suppliers, producers spikes up the price often, especially after natural calamities. They say that problem of transportation, higher input costs etc. made their total cost to rise and hence, they had no other option left without raising up the price to cover their cost. But most of the cases (almost 1/3rd of total case of US) were proved false. Hence, in many states antigouging laws have been implemented. Price gouging is done generally in the period of emergency and necessary items. Antigouging laws set the price at a fixed level. This has issues: 1. Producers will have less incentive during this period to supply more and hence, production will curb down. 2. Capitalist class loses a section of wealth who were able or ready to exchange goods and services at a higher price at post-hurricane period.

Fall in production will enhance the consumer demand on the otherhand due to shortage of goods and make consumer willing to buy at higher price on first come first serve basis. This may also raise the probability of black marketing.   

Traders who had gone for forward contracts or speculators who wished to transact earlier at a time when actually hurricane comes may face loss. As per the neo-classical economists it distorts the allocative efficiency.

If in any case cost really rise too much then, producers face loss. But the consumers who are stuck by catastophe and do not really have adequate wealth to survive gain from this law as they have their necessities at a lower price. But since private producers\' animal spirit go down for investment, the production falls. This affects the investment and further national income of an economy.