Price-gouging or price-fixing — which is worse?

Shortages and rationing accompany large-scale disasters in the same way that Netflix's Tiger King's stars find trouble.  In this COVID-19 pandemic, toilet paper, hand sanitizers, and surface cleaners are hard to come by.  And like clockwork, government attempts to fix prices to allay the effects of a disaster are misguided at best and sometimes making the problems worse.

It's a good time to reflect on prices and how they affect economic decision-making.  As Stanford economist Thomas Sowell has pointed out during the spate of hurricane crises a few year ago, prices do three things: first, they allow sellers to recoup the expenses associated with procurement, manufacture, and distribution of products; second, they limit the demands of buyers; and, finally, cause goods, and those resources that produce them, to flow in one direction through the economy rather than in a different direction.  Changes in price then signal changes in supply and demand.  When the government fixes prices, the signal to would-be producers or consumers is muddled if not erased, giving both parties false information upon which to act.  This can cause a lot of problems that are not easily apparent to economic actors.

For suppliers and vendors, being able to raise or lower prices can mean the difference between products being available almost immediately and being available much later than when truly needed.  A typical example is the case after Hurricane Fran in North Carolina in '96, described by economist Michael Munger.  This was a Cat 3 with 120 mph winds that dropped 10 inches of rain in just a few hours.  Power outages, road blockages, 92+-degree temperatures, and no ubiquitous internet like what we have today led to shortages of all kinds, especially ice, lumber for roof repair, and tree-removing equipment.  North Carolina had in place an "anti-gouging" law that punished vendors who sold products over 5% more than they were before the storm, with fines of up to $5,000.  Fear of paying the steep penalty, and the risk of untold legal trouble, caused people who were positioned to help simply not to bother.  Fixing prices to a 5% increase killed any incentive for folks to do what was necessary to assist in life-saving interventions.  Indeed, the prospects became so unattractive that relief there became unnecessarily delayed, causing suffering that would not have otherwise occurred.

Since that time, many states have passed more feel-good "anti-gouging" legislation, attaching exorbitant penalties to people eager to take risks, to go into harm's way and to provide much needed relief to a suffering populace. 

It isn't just toilet paper and hand sanitizer.  Government price-setting for any product is among the least preferential option for solving emergency supply and demand problems.  Last week, HHS released guidance regarding the disbursement of funds provided for in the CARES Act Relief Fund.  HHS conditions the money to health care providers with this caveat: "providers are obligated to abstain from 'balance billing' any patient for COVID-related treatment."  "Balance billing," or what is sometimes called "surprise medical billing," is where insured patients can face unexpectedly high charges when a member of a medical team who treats them is not in their insurer's network.  This is most likely to happen in a medical emergency situation, where hospitals have to use out-of-network specialists. 

This seems to be a particularly bad time to be limiting physician pay during a medical emergency — and giving all of the market power to insurance companies that are currently racking up record profits.  There are better ways to address the issue of surprise bills than putting all the pressure on physicians.  In fact, several states have already passed laws that allow for independent dispute resolution, which has the goal of putting the insurance companies and the physicians at the table to fight over bills — and saves the patient.  But now, when the peripheral effects of this dictate have not been adequately examined, is not the time to create new government price control.

It is clear that prohibiting the natural movement of prices causes untold harm, and setting prices artificially lower than would occur seems likely to cause shortages of things people in a crisis need the most — in this case, health care.  Let the market work, and let me watch that new episode of Tiger King.

Shortages and rationing accompany large-scale disasters in the same way that Netflix's Tiger King's stars find trouble.  In this COVID-19 pandemic, toilet paper, hand sanitizers, and surface cleaners are hard to come by.  And like clockwork, government attempts to fix prices to allay the effects of a disaster are misguided at best and sometimes making the problems worse.

It's a good time to reflect on prices and how they affect economic decision-making.  As Stanford economist Thomas Sowell has pointed out during the spate of hurricane crises a few year ago, prices do three things: first, they allow sellers to recoup the expenses associated with procurement, manufacture, and distribution of products; second, they limit the demands of buyers; and, finally, cause goods, and those resources that produce them, to flow in one direction through the economy rather than in a different direction.  Changes in price then signal changes in supply and demand.  When the government fixes prices, the signal to would-be producers or consumers is muddled if not erased, giving both parties false information upon which to act.  This can cause a lot of problems that are not easily apparent to economic actors.

For suppliers and vendors, being able to raise or lower prices can mean the difference between products being available almost immediately and being available much later than when truly needed.  A typical example is the case after Hurricane Fran in North Carolina in '96, described by economist Michael Munger.  This was a Cat 3 with 120 mph winds that dropped 10 inches of rain in just a few hours.  Power outages, road blockages, 92+-degree temperatures, and no ubiquitous internet like what we have today led to shortages of all kinds, especially ice, lumber for roof repair, and tree-removing equipment.  North Carolina had in place an "anti-gouging" law that punished vendors who sold products over 5% more than they were before the storm, with fines of up to $5,000.  Fear of paying the steep penalty, and the risk of untold legal trouble, caused people who were positioned to help simply not to bother.  Fixing prices to a 5% increase killed any incentive for folks to do what was necessary to assist in life-saving interventions.  Indeed, the prospects became so unattractive that relief there became unnecessarily delayed, causing suffering that would not have otherwise occurred.

Since that time, many states have passed more feel-good "anti-gouging" legislation, attaching exorbitant penalties to people eager to take risks, to go into harm's way and to provide much needed relief to a suffering populace. 

It isn't just toilet paper and hand sanitizer.  Government price-setting for any product is among the least preferential option for solving emergency supply and demand problems.  Last week, HHS released guidance regarding the disbursement of funds provided for in the CARES Act Relief Fund.  HHS conditions the money to health care providers with this caveat: "providers are obligated to abstain from 'balance billing' any patient for COVID-related treatment."  "Balance billing," or what is sometimes called "surprise medical billing," is where insured patients can face unexpectedly high charges when a member of a medical team who treats them is not in their insurer's network.  This is most likely to happen in a medical emergency situation, where hospitals have to use out-of-network specialists. 

This seems to be a particularly bad time to be limiting physician pay during a medical emergency — and giving all of the market power to insurance companies that are currently racking up record profits.  There are better ways to address the issue of surprise bills than putting all the pressure on physicians.  In fact, several states have already passed laws that allow for independent dispute resolution, which has the goal of putting the insurance companies and the physicians at the table to fight over bills — and saves the patient.  But now, when the peripheral effects of this dictate have not been adequately examined, is not the time to create new government price control.

It is clear that prohibiting the natural movement of prices causes untold harm, and setting prices artificially lower than would occur seems likely to cause shortages of things people in a crisis need the most — in this case, health care.  Let the market work, and let me watch that new episode of Tiger King.