Price-gouging? Think again

Published 10:26 am Thursday, August 30, 2012

It’s hurricane season, and the threat of Isaac hitting Alabama or one of our neighboring Gulf states has dominated recent news coverage, prompted thousands of people to cut their vacations short, and led to many others stocking up on food and supplies. Along with the thousands of individual decisions being made to prepare for a possible storm, governments around the Gulf Coast have put into emergency plans, mandatory evacuations, and other measures to show they are on top of the situation. While government measures might sometimes help people out during emergencies, some of their actions do more harm than good.

Anti-gouging rhetoric and policies during emergencies, for example, are disruptive and cause more harm during crises than good.

Like many lawmakers across the Gulf states, our attorney general, Luther Strange, assured us the state would enforce the “unconscionable pricing” provision found in our State of Emergency declaration. The provision prevents prices from rising more than 25 percent of above average prices, and offenders could be fined up to $1,000 per violation.
The policy, while based on good intentions, has proven time and again to have devastating economic results. During times of crisis, we should expect prices to rise.
Uncertainties about the available supply of key resources, such as oil, hotels, and lumber, causes an increase in demand. Higher demand means higher prices. And, higher prices, of course, means there’s now a chance to play politics with market forces.

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Rather than get caught up in the emotional appeals about price gouging, people should pause for a moment and ask themselves the following: What are the higher prices telling us?

The higher prices observed after hurricanes and other natural disasters are not the result of entrepreneurs suddenly becoming greedy opportunists; nor are they result of random forces. Instead, they reflect the changing fundamental conditions present in markets. The higher prices we observe in natural disasters have two desirable effects. First, they encourage consumers to economize and be more careful about how much of a scarce resource they use. Second, they tell producers more goods and services are needed and should be delivered to a particular area. Rather than think of high prices as something to legislate away, we should instead be thinking of them as a vital part of the market process: The higher they rise, the more desperate people in the area have gotten for the scarce goods and services being demanded.

When State of Emergencies are declared, the signals being communicated in an open market get distorted and suppliers do not show up with the much-needed goods and services. The anti-gouging legislation, which seeks to help people in a crisis zone, leads to a shortage economy where long lines and a lack of resources are the norm. Hurricane Katrina in 2005 was one of the more severe examples of a shortage economy: Oil tankers turned away from New Orleans because regulated gasoline prices were not high enough to cover the risk and costs associated with entering a city underwater and in anarchy. Back in 1989, Charleston, SC imposed price controls after Hurricane Hugo hit. Official prices were kept low, but black markets popped up and Charleston was slow to recover.

People worried about price gouging often say something like the following: “The same gasoline was in the pumps the day after a hurricane as the day before.” Therefore, the price should be the same today as it was yesterday. Their argument misses the point: The gasoline after a hurricane is more valuable than it was beforehand. It should, therefore, fetch a far higher price in the market.
Higher prices are rational, fair, and reflect the fundamental forces of supply and demand. Any emergency measures to prevent prices from rising will have the same predictable effect: New supplies will not reach the people most in need of the resources and shortages will occur. The two main points I am making-– price controls are inefficient and anti-gouging legislation is counterproductive –are basic points all economists agree on and almost all are against; for our political elites, however, attempts to deny the laws of supply demand – by calling for price controls and anti-gouging legislationm– never get old and are as recurrent as hurricane season itself.

Scott Beaulier is Executive Director of the Manuel H. Johnson Center for Political Economy at Troy University.