Texas state law
defines price gouging as
taking advantage of a disaster declared by the governor under Chapter 418, Government Code, or by the president of the United States by:
(A) selling or leasing fuel, food, medicine, lodging, building materials, construction tools, or another necessity at an exorbitant or excessive price; or
(B) demanding an exorbitant or excessive price in connection with the sale or lease of fuel, food, medicine, lodging, building materials, construction tools, or another necessity
John Stossel has a video
in which he argues that price gouging should be legal since the law of supply and demand ensures that supply meets demand through optimal pricing. The
flaw in his argument is in assuming that this economic law works in emergency
situations where buyers have little to no choice about purchasing necessities
from the seller at any price. How much is one willing to pay for a
bottle of water when dying from thirst?
As an example of this, recently the Electric Reliability Council of Texas (ERCOT) charged an exorbitant price for electricity during a state-wide winter emergency. Rather than holding prices at the normal rate as the ability to provide electricity fell below minimum demand, they instead let the price rise to the legal maximum despite consumers having no choice about buying the electricity. How much is one willing to pay for electricity to heat a home during a multi-day freeze?
As sellers profit tremendously when buyers must buy their product at any price, sellers are not financially incentivized to prevent such situations from occurring. There is a conflict of interest when the seller is both the entity responsible for preventing such disasters and simultaneously the one that profits from them. This situation is also a moral hazard in that the seller can assume a high level of risk with the buyers being forced to assume the costs of those risks.
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