Do Markets only work when the Sky is Blue?
Alexander C. Cartwright & Dylan DelliSanti
As hurricane Isaac captured our country’s attention and delayed the Republican National Convention, state and local governments were receiving persistent media attention highlighting what each government was doing to protect public safety. Tampa’s mayor proudly advertised that part of the hurricane preparation process includes a hotline where consumers can report price gouging. Price gouging occurs when a price advertised 30 days prior to an emergency being declared is extremely different price the price of the same good during an emergency.[i] Already 160 Floridians have used the hotline and investigations are in process.[ii] Ironically, price-gouging laws might punish more people than those who are actually prosecuted.
Price gouging laws are the result of public outrage at increased prices during natural disasters. During times of emergency, consumers buy more batteries, gasoline, food, perhaps hardware store materials for protection, and other necessary items to help them weather the storm. The increase in demand for goods that people need during an emergency, leads business owners to raise prices. Citizens desperately trying to preserve their property, and often their lives, during an emergency, feel slighted by price increases; understandably so. The last thing anyone wants when trying to fill-up his car in order to evacuate his home to avoid a hurricane, is to find $6.00 per gallon gas prices.
To remedy citizen’s dilemmas, these unhappy consumers have paired up with vote-maximizing politicians to create laws against price gouging so that businesses can’t “abuse” increased profit opportunities during natural disasters. Unfortunately, price-gouging laws only leave the politicians with more votes and the consumers in more danger.
During a disaster, like a hurricane, businesses also have to operate under the effects of storms. In order to produce goods during a time of emergency, keep the businesses open, pay employees to work during storms, and ship in products from out of town under harsh weather conditions, businesses have to demand a higher price to cover higher operating costs. The freedom for businesses to raise their prices in order to provide products during a disaster is a good thing, because the alternative is not that pre-disaster prices are maintained, but that no goods are sold, and no additional goods are brought in to meet the increased demand. Higher prices allow companies to get us the products we need in the quantity we need them during difficult conditions.
Moreover, higher prices tend to discourage consumption that might be considered frivolous. When prices rise, consumers will restrict consumption to those most highly valued uses. When prices are restricted, the allocation of goods becomes arbitrary as opposed to guided by prices. For instance, in 2003 price caps on batteries during Hurricane Isabel lead stores to give them out first come, first serve[iii]. This rationing system lead to some consumers having many batteries for less valuable uses and other consumers having no batteries at all. Moreover, if stores are forced to give products away, they might not be likely to prevent looting, which could erode the established social order.
Some will object to price increases on the grounds that products already in stores shouldn’t be subjected to price increases since they were in stock and being sold for lower prices before the emergency. This position fails to recognize that there is a cost to time and place. Once time and weather changes, the opportunity cost on stores’ inventories is more expensive; this new opportunity cost is reflected in price changes.
Price gouging laws have long been proven to be ineffective at achieving their intended end, yet the laws still exists; we pay government officials to punish business owners and make us worse off during times of emergency. Interestingly, we choose to allow markets to provide us with all the services we need in our daily lives, but magically believe that government is capable of doing what it cannot just because the weather gets bad.
[i] Golden, Roger. “Gas Price Gouging Laws in Florida” http://www.ehow.com/list_6511180_gas-price-gouging-laws-florida.html
[ii] Gehrke-White, Donna. “Scores of Floridians complaining of price gouging since Isaac” The sun Sentinel. http://www.sun-sentinel.com/business/blogs/money-sense/sfl-price-gouging-isaac-20120827,0,2520242.story