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
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