There exist some people, usually called “economists,” who have a theory that explains why price ceilings create shortages. Most other people believe that there is no relation between prices and whether shelves are bare or fully stocked. Within this last category, there are those who insist that prices should be prevented from rising when supply decreases or demand increases.
In a recent post (“Why Shortages Are Not More Widespread,” August 17), I wondered why, despite the “price gouging” laws on the books in more than two-thirds of American states (including virtually all the largest ones), shortages were not more widespread; and why prices of meat, poultry, fish, and eggs had been allowed to rise, thereby preventing shortages of them. I wondered if farmers are more immune to the heavy and arbitrary hand of the state.
An article in the Wall Street Journal by agricultural economists Richard Sexton and Daniel Sumner, both at the University of California at Davis, just shed more light on this issue (“New York AG Lays a Rotten Egg,” August 30). At least one large egg producer has been sued. Small farmers, even if they are official favorites of the state, may now yield before the threat they may have thus far ignored.
On August 11, New York Attorney General Letitia James sued Hillandale Farms, a large producer and supplier of eggs based in Ohio, for having “exploited hardworking New Yorkers” and “made millions by cheating our most vulnerable communities and service members.” It committed these horrible sins by letting consumers bid up the price of eggs instead of finding none on what would otherwise have been bare grocery shelves.
New York State’s “price-gouging” law (General Business Law, Section 396-R) states:
During any abnormal disruption of the market for goods and services vital and necessary for the health, safety and welfare of consumers or the general public, no party within the chain of distribution of such goods or services or both shall sell or offer to sell any such goods or services or both for an amount which represents an unconscionably excessive price. …
This prohibition shall apply to all parties within the chain of distribution, including any manufacturer, supplier, wholesaler, distributor or retail seller of goods or services or both sold by one party to another when the product sold was located in the state prior to the sale.
The was amended in June and, as the astute reader may guess, not in order to make it less liberticidal but instead to extend its reach. In the quote above, “or services or both” was added after “goods.”
The petition against Hillandale Farms is presented to the Supreme Court of the State of New York on behalf of “the People,” as if it were some sort of super individual à la Jean-Jacques Rousseau. A few quotes:
The People of the State of New York (“the People”) …
The NYAG [New York Attorney General] on behalf of the People, alleges upon information and belief …
The People repeat and re-allege paragraphs 1 through 67.
In their Wall Street Journal piece, Sexton and Sumner report that “price gouging”—which is part of the economic freedom to respond to price signals—motivated egg suppliers to expand their production capacity, with the result that by late-April, “though demand remained high, prices in New York and nationally returned to pre-pandemic levels.” According to the Bureau of Labor Statistics, egg prices at the retail level are still about 6% higher than in February, but they are down 11% from their April peak. This is what we would expect: if prices are not effectively capped, they will soar in an emergency and, as suppliers try to profit from these higher prices, more production will be forthcoming, which will eventually push prices back down—although not necessarily to their original level if demand remains higher and long-term marginal production cost increases.
The efficiency of letting prices respond to conditions of supply and demand is involuntarily confirmed by the Attorney General’s own charts, one of which is reproduced below, representing the invoice prices of eggs sold by Hillandale to Stop & Go.
One would think that, in “the country of free enterprise” as we used to say, the president would give the Medal of Freedom to Hillandale Farms and other egg producers who made this happen by increasing their production to profit from high prices. (Let’s keep our dreams under control. The current president understands economics as little as the framers of price-gouging laws: he invoked the Defense Production Act precisely to be able to cap the prices of medical goods and PPE, which is why they remain in shortage, contrary to eggs.) The New York Attorney General shows that economics was not her strong field in college or that she has an illiberal conception of the state or that she is willing to say anything—as can be double-checked in two sections of her petition:
50. Hillandale informed the NYAG that its customers have “agreed to” [sic] Hillandale’s pricing practices.
51. To the extent that any such agreements with its customers purport to allow Hillandale to charge unconscionably excessive prices for eggs during an abnormal market disruption, such provisions are illegal, in violation of public policy, and unenforceable under New York law.
The Attorney General might reply that the New York price-gouging law does not forbid a supplier to charge higher prices if his own suppliers charge him more. She claims that Hillandale faced no such higher cost and she is asking the court to force the company to pay her office all egg sales revenues in New York State over and above what they would have been at the prices prevailing in the 30 days preceding its “price gouging.” She is also asking the court to force the company to “disgorge all profits” (among other penalties). How any profit could be left if her first request is granted is another mystery.
She obviously ignores there is always a cost of doing something, which is the opportunity cost of not doing the next most profitable thing instead. The farmer who caters to more hens could instead work elsewhere or take more leisure. And consider that if everybody is forbidden to charge higher market prices (what purchasers are willing to pay) except those who are faced with higher accounting cost, the ones at the beginning of the supply chain—the farmers in our case—will not increase production and shortages will appear and move the chain up to the final consumer. Finally, who trusts government bureaucrats to calculate a private producer’s costs?
Except to those who prefer allocation by government instead of by the market (despite the experience of Venezuela or the Soviet Union), price controls make no sense. (See also my Econlog post “Good Government Greed, Bad Economic Freedom,” August 12.)