American economist Thomas Sowell famously said, “The first lesson of economics is scarcity: there is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.” There is perhaps no clearer demonstration of this than when natural disasters strike and the government reacts by imposing price controls on vital consumer goods such as food, water and gasoline.
These controls are enacted with the intent of protecting consumers from so-called “price gougers;” individuals or businesses selling essential goods or services during a time of crisis at prices deemed excessive or unfair by policy makers. Thirty-four states currently have laws prohibiting price gouging, including Texas and Florida, which were recently devastated by Hurricane Harvey and Hurricane Irma, respectively. Although policy makers mean well when they implement these laws in times of crisis, price controls have unintended and unavoidable consequences which result in more harm than good.
In economics, there are no perfect solutions to the problem of how finite resources should be distributed, there are only tradeoffs. So, it is not that leaving the market untrammeled in the wake of a disaster is a perfect solution, but rather that it is the best possible alternative. Let’s examine why this is the case.
During an event like a hurricane, the demand for essential goods and services increases, and the supply decreases. This causes an increase in the market price of those goods. But, laws prohibiting price gouging set an upper limit on prices, and so the prices are prevented from rising to their equilibrium level.
The price of a good not only carries information about its levels of supply and demand, but also carries incentives for both buyers and sellers. If demand for a consumer good increases while its price is kept artificially low through government intervention, there is an incentive for consumers to buy more of it than they actually need. The incentive is to get as much as you can, and the low price allows this to happen. Additionally, the artificially low price destroys the profit motive for sellers to move into the market, and so the supply does not rise to meet the demand. What this leads to is a shortage of essential goods.
If the market were left untouched by government, the situation would be entirely different. First off, prices of goods would rise to reflect reality. Consumers would have an incentive to only buy as much as they truly needed. On the supply side, people would have a profit incentive to travel from out of town, or even out of state, to sell the things that are most needed in the affected area, such as generators, food and water. This would allow the supply of goods to rise to eventually match the demand for them. And, the increase in supply produces competition, which would lead to the price gradually decreasing back to pre-disaster levels. What this ultimately amounts to is a more efficient distribution of resources, where goods are allocated to where they are most needed.
Now, an objection that is always raised is that the poor will not be able to afford essential goods if the prices are allowed to rise to their natural level. While this is certainly something to be concerned about, and while it may or may not be true, it is critical to ask this question: What good are affordable prices if the product is sold out?
Instead of imposing price control, a better solution may be to distribute government vouchers for vital goods to the poor. That way, those who may not be able to afford the goods at higher prices will be subsidized so that they can. But what is critical is not to impose a policy that results in a shortage of resources where and when they are most needed.
When laws prohibiting price gouging are enacted, what results is predictable. Right before Irma struck Florida, a picture surfaced on the internet of a woman and her daughter in the grocery store who were preparing for the impact of the hurricane. They had three shopping carts, each piled high with cases of water. Now, to be clear, I am in no position to state with certainty that they did not need all of that water. I have no idea what they planned on doing with it, and for all I know, they could have been distributing some of it to neighbors in need. But, that being said, I highly doubt that was the case. It is much more likely that they, along with many others, bought way more water and other goods than were needed. And of course, that is a rational reaction to the uncertainty of the hurricane’s impact, that is incentivized by prices being kept artificially low.
Hoarding essential goods is a predictable consequence of laws against price gouging; so are long lines at gas stations and grocery stores. What is important to note is that prices are not the only form of a cost to consumers. Time is also a cost.
When price controls are enacted, consumers still pay a high cost for goods; it is just that some of the cost is transferred into the form of time. With price gouging laws, the goods usually just go to those who show up first-which is a much less efficient, and in some sense more arbitrary system of distributing resources.
What I am proposing to you here is that price gouging should be legal. However, I am not claiming that price gouging is morally acceptable—that is a different question. On the surface of it, price gouging appears to be indefensible, but this view falls apart under examination.
Although it is far from a perfect solution, allowing the market to run its course, with the possible addition of vouchers for the poor, is the best option available.
Sam Dugan is a fourth-year student majoring in economics. They can be reached at SD829860@wcupa.edu.