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Should the government prevent price gouging?

Texas Attorney General and economist debate the issue with Dan Abrams

Supply and demand determines prices for almost everything.  But should it in the wake of a devastating hurricane? 

If someone is attempting to board up their house ahead of a hurricane and the price of plywood suddenly shoots up or if people stuck in traffic trying to leave Houston are suddenly hit with gas that costs $5 or $10 a gallon - is that right?

Twenty-seven states and the District of Columbia have laws or regulations against price gouging in a declared disaster.  Two weeks ago a "Wall Street Journal" editorial headline read 'In Praise of Gouging' noted that "in almost all cases, such laws are wrongheaded because they short circuit the price system that matches price with demand."

With Hurricane Rita bearing down on Texas, that state's Attorney General's Office has fielded at least 100 complaints about price gouging, a crime that can be punished with a civil fine of up to $20,000 for each violation. 

On Thursday, Dan Abrams welcomed Dr. Andrew Bernstein, the author of "The Capitalist Manifesto" and a senior writer with Ayn Rand Institute and Texas Attorney General Greg Abbot to 'The Abrams Report' to discuss the issue of price gouging

To read an excerpt of their conversation, continue to the text below. To watch the video, click on the "Launch" button to the right.

DAN ABRAMS:  All right, so you know that most people out there in the public are going to say it's a good thing that in particular instances that the government steps in and says we're not going to let them take advantage of the situation. 

ANDREW BERNSTEIN:  Well, I don't agree.  I think there's two points that need to be made, Dan.  One is the moral point and that is if somebody owns property that I don't own, they have a right to ask any price for what they want just as I have the right to refuse that price.  Also, the practical point is that on a free market when the price rises, what that does is enables the producer to make more profit giving them more motivation... to increase the supply. 

ABRAMS:  But the motivation argument is really not really relevant here because you are talking about very small periods of time and you are basically saying, if they know that ... there's going to be a disaster and they can suddenly make more money in that particular period, they're going to produce more.  I mean come on, as a practical matter, that's not going to happen. 

BERNSTEIN:  Well again, I want to make two points.  The moral point is in a free country such as the United States, which is not a dictatorship, somebody who owns property has the right to determine what price he ... wishes to charge.  The government can't be granted the power to tell me what I can charge with my own property. 

ABRAMS:  In this country we generally have a free market system but we also have certain protections.  The government gets involved in certain industries to try to make sure that things are in essence done more equitably and as a result, the market, the argument goes, ends up working better, more efficiently. 

BERNSTEIN:  Well I think that argument is false.  I think the economists have exploded that myth many times.  Remember you said it before; basic economics, prices rise when demand exceeds supply.  What is causing the supply to be diminished here and environmental restrictions imposed by the government preventing us from building refineries, preventing us from drilling on ANWAR on the OCS, from building nuclear power plants. 

ABRAMS:  All right. ... We're joined now by Greg Abbott, he's the Texas attorney general.  He's put retailers on notice that price gouging during a disaster is illegal and he is going to go after them.  All right, Attorney General, thanks very much for taking the time.  Basically what Dr. Bernstein is saying is he's saying that you know look, somebody owns a piece of property and they own something, be it gasoline, be it food items, be it whatever and they should be able to sell it for as much money as they can get for it. 

GREG ABBOTT, TEXAS ATTORNEY GENERAL:  I'm the very first person to step up and believe that our free and open markets here in this country are very effective at setting prices.  And that's the way it works all the time except in times of crisis.  In times of crisis when people are literally struggling to try to protect and save their lives, it is not a free and open market. 

It's a market that is ruled in this case by complete uncertainty and people grabbing the first thing they can.  And I might add, it is an artificially created market.  In our efforts to go after price gougers, we found one instance down by the Gulf Coast where a gas station had 20 pumps that were available to provide gasoline for customers, but to create artificial demand and to decrease the supply, the gas station shut down half of those pumps until we stumbled upon it. 

We found it and we caused them to open back up their pumps and back again the price went to the normal gas price.  But we're dealing with a situation where people are having to flee by the millions from the Gulf Coast in order to save their lives.  As a result normal market forces don't apply.  ... It is only in these exceptional circumstances when law must step in and ensure that people will be protected.

ABRAMS:  Dr. Bernstein, your response.

BERNSTEIN:  I don't agree.  I think that, again, don't hit the American people with more of the poison that has caused the disease.  It's governmental restrictions on the market, particularly environmental laws.

ABRAMS:  ... That's a nice macro argument.  Let's talk specifically about what the attorney general is saying, is he's saying I'm only talking about disasters.  I'm talking about a very finite short period of time, period. 

BERNSTEIN:  Again, what you do by diminishing the price below market levels as you are going ... you're going to increase the demand, more people are going to want the product.

ABRAMS:  But everyone wants it ... in a disaster.  Everyone wants it, we know that.

BERNSTEIN:  First law of economics is the lower the price, the more you increase the demand. ...

ABRAMS:  So you're talking broadly and you're saying that there's no merit to the attorney general's argument, which is that in a finite period in a disaster the wake of a hurricane for a short period of time, it's not a good thing for the government to occasionally step in. 

BERNSTEIN:  Yes, that's right.  What you do is cause shortages.  What that means is people who want the product and have the means to by the product cannot buy it because you've raised the demand...

ABRAMS:  All right, attorney general ... what do you make of that? 

ABBOTT:  The argument doesn't make sense.  Obviously it's a theory.  It's a theory that works in a macro context.  It does not work in times of emergency.  In times of emergency we as a country have an obligation to help take care of those who are most vulnerable.  We are dealing with real-live people, not with theories.  We are dealing with people who are trying to flee a very deadly hurricane. ... And they have to get out of the hurricane's way.  In order to do so, they should not be bilked by price gougers. 

Watch the 'Abrams Report' for more analysis and interviews on the top legal stories each weeknight at 6 p.m. ET on MSNBC TV.