In the aftermath of Hurricane Sandy comes the entirely predictable harangues against "price gouging." Politicians and media figures channel their inner Madame Defarges, condemning "greedy" merchants who raise prices sharply on high-demand items during a crisis or in its aftermath. Since 1979 a majority of states have passed laws limiting price increases on certain critical goods and services during declared emergencies. Some of these laws impose criminal penalties for violations. These laws have an undeniable emotional appeal. Emergencies like Sandy inflict widespread hardships and people react viscerally when a few appear to benefit at the expense of their neighbors simply because they happen to have goods or services to sell that have suddenly become in short supply.
However, price gouging is just a pejorative term for the rational movement in prices in response to temporary localized shortages. Higher prices in these situations are neither immoral nor parasitic. They perform two functions necessary to coping with shortages. Firstly, they encourage conservation and economizing. Secondly, they encourage suppliers to enter the market who would not have been able to do so economically under lower prices. Anti-gouging laws prevent these ameliorative forces from operating. Nevertheless they are popular with politicians because the benefits of such laws to a discrete, politically significant constituency are easily apparent while the costs are less visible.
The reporting on Hurricane Sandy over the past week has disclosed multiple examples of the harm caused by anti-gouging laws although the reporters involved were apparently too blinded by economic populism to recognize them. The long gas lines seen in New Jersey and New York are a direct result of gas prices held artificially low by anti-gouging laws. Increased prices for commodities like fuel, water, construction materials, etc.in the aftermath of a weather emergency simply reflect the fact that those commodities become significantly more valuable in such conditions due to disruptions in supply and, in some cases, increased demand. Artificially holding prices low does nothing to change the intrinsic value of the goods and services affected. Consumers know this and they are encouraged to purchase, and hoard, these items because they can obtain them at below-market prices - hence the long gas lines.
If prices were allowed to rise to reflect the real value of commodities, people would be encouraged to reevaluate their requirements. Should they fill up their gas tanks as if nothing had happened? Or should they make alternate arrangements on a temporary basis? People could arrange car pools, take public transportation, take a bicycle to work. If available and practicable they could take vacation time. On the supply side, suppliers from outside the affected area might find that higher prices make it economical to divert product from their existing customers to meet the emergency demand. Or they could increase production, put employees on overtime, or take other measures to increase their output on a temporary basis. Scarce commodities get allocated according to real demand on something approaching a rational basis.
Instead, with prices held artificially low, scarce supplies go to those lucky enough to reach them before they are sold out. No pressure is placed on anyone to conserve. The results are that motorists wait in gas lines for hours only to find that the tanks are empty when they finally reach the pump. Television reporters related that some vehicles in line were running on fumes while others had half a tank or more and were looking to top up. Who knows if any of the motorists languishing in long gas lines took the opportunity to reflect that low prices are of limited benefit if there is nothing to buy?
Also, as a practical matter, anti-gouging laws can't really touch the secondary market. Which is why people in New York were posting to Craigslist with offers of gasoline, presumably purchased at somewhere between $3.50 and $4.00 per gallon, at $15.00 per gallon. The laws of economics are as immutable as the law of physics. Attempting to prevent rising prices in the wake of a hurricane reflects an ignorance and arrogance that would only be exceeded by attempting to ban hurricanes themselves. Of course President Obama, who famously promised to slow the rising of the oceans, might just think he can get away with it.
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