Every time another natural disaster threatens havoc, media and layman alike come prepared with their rhetorical scourge for the price gougers: those who would dare take advantage of severe shortages to rake in a windfall in times of crisis at the expense of the helpless. Surely, it must be the most selfish of mankind who would stoop to such deplorable practices. Government, come the cries, must stop this public menace with price controls and steep penalties for violations.
Selfish desire to take advantage of a crisis may indeed be the motive of the so-called price gouger, but a focus on motives in crisis should not divert our attention from very real economic incentives and consequences. Contrary to popular opinion, the price gouger, in fact, serves as an important step in alleviating a food and supply crisis. And to stop him only encourages hoarding and delays a return to normalcy.
How can this be? To charge $10 for a bottle of water forces households to spend possibly hundreds on such an essential resource. And $500 hotel rooms inland from a hurricane’s path may cripple a low-income family’s savings. The pain felt by “price gouging”, especially by those of less means, is too obvious to ignore.
But we need not ignore it. We must instead understand the positive effects of “price gouging” and the negative impacts of price controls to prevent it. That is just my intent.
First, price gouging encourages rationing in the most equitable way. In times of crisis, severe scarcity is inevitable; there is no way around this. Resources in crisis become a product in high-demand, which is exactly why prices rise so quickly. Fewer resources relative to the demand for those resources push prices upward, and steeply in crises. Such high prices then cause people to limit purchases of such vital resources and goods to just what they need. This, in turn, leaves more for everyone else.
To impose price controls, on the other hand, encourages hoarding. What’s to stop the first people who get to the store from purchasing far and above what is absolutely essential for their needs, leaving less for everyone else?[1] And of course, those with the greatest difficulty of reaching stores—the elderly, sick, or disabled without adequate family support, or those without transportation—are those who will end up being hurt the worst. “Appeals to people to limit their purchases during an emergency,” Economist Thomas Sowell writes, “are seldom as effective as raising prices.”[2]
In times where mass evacuations may otherwise drive up hotel room prices, price controls encourage less efficient use of space. A large family may rent two rooms for comfort rather than uncomfortably squeezing into one if prices are not allowed to rise, leaving fewer available rooms for others. At a time when space is at a premium, its most efficient use and rationing should be encouraged, not discouraged. Sowell writes, “The role of prices in allocating scarce resources is even more urgently needed when local resources have suddenly become more scarce than usual.” Likewise, he adds, “When the local population wants more hotel rooms than there are available locally, these rooms will have to rationed, one way or another, whether by prices or in some other way.”[3]
Second, so-called price gouging will be the most effective means of alleviating a shortage. If a single bottle of water in a crisis area can earn a massive profit margin, and thousands or millions of such bottles windfall profits for a water bottle company, then water bottle companies will go through great lengths to be the first to bring supplies into a disaster area. And to take a slice of the earnings, they must be one of the first, for they know that competition will soon also rush into the area and very quickly drive prices down to normal levels. (Of course, the same is true for batteries, flashlights, gasoline, et cetera.)
It is just this competition to be the first to capitalize on the high prices that drops prices again and brings vital supplies into a disaster area. Yes, there will always be a praiseworthy effort by many individuals, businesses and charities to bring in supplies, but to remove the profit-incentive from high prices necessarily delays a complete re-supply of the necessary resources needed to alleviate the shortage of a severe disaster.
In cases such as Hurricane Florence where the disaster zone is more or less predictable, the opportunities for high prices would draw in more resources even before the disaster. Sowell makes this case:
“Supplies of all sorts of things that are usually needed after a hurricane strikes…are more likely to be rushed to the area where the hurricane is likely to strike, before the hurricane actually gets there, if suppliers anticipate higher prices. This means that shortages can be mitigated in advance. But if only the usual prices in normal times can be expected, there is less incentive to incur the extra costs of rushing things to an area where disaster is expected to strike.”[4]
Sadly, the political gains of a ban on “price gouging” derived from the public praise of such policies deprives disaster areas of important economic incentives that would otherwise alleviate such a crisis faster or perhaps even in advance. The politician has much to lose from ignoring price spikes and much to gain from stopping them. Those impacted by the disaster, on the other hand, miss out on the public service provided by so-called “price gouging”, a service more equitably rationing much-needed supplies and more quickly alleviating a shortage.
[1] This is not just logical deduction, but is what has consistently been recorded as happening in cases like Hurricane Katrina and Sandy. For example, in the aftermath of Hurricane Sandy in 2012, the Wall Street Journal reported the following: “At one New Jersey surpermarket, shoppers barely paused for a public loudspeaker announcement urging them to buy only the provisions needed for a couple of days of suburban paralysis. None seemed to be deterred as they loaded their carts to the gunwales with enough canned tuna to last six weeks. … Shoppers take no risk in buying out a store’s entire supply at the normal price.”
[2] Sowell, Thomas. Basic Economics. © 2015, Basic Books, New York, NY. Page 63.
[3] Ibid, 61.
[4]Ibid, 62.
Thumbnail photo credit goes to the Foundation for Economic Education.
