With Hurricane Florence bearing down on the southeastern coast of the United States, government officials are working round the clock to make things worse by prohibiting price gouging.
Why? How? Arent these officials protecting the helpless and vulnerable from vultures who would exploit them in their time of need? It might feel like it, but theyre actually making matters worse by shutting down the mechanismrising pricesthat efficiently and effectively dispatches knowledge and information around the world and calls desperately-needed resources to the areas that are likely to be most affected by the storm.
Its well-known that price controls create shortages in competitive markets. When a price is below the equilibrium price, quantity demanded exceeds quantity suppliedand by preventing prices from adjusting, price gouging laws remove demanders incentives to think twice about just how much gas, bottled water, and so on they really need while, at the same time, removing suppliers incentives to move gas, bottled water, and other supplies on from where it is likely to be of relatively low value to where it is of relatively high value.
Price gouging laws mean gas, for example, is going to be misallocated. Its a big weekend for college football fans, and a lot of people in Birmingham are going to gas up their RVs, trucks, vans, and cars and drive to Auburn for the Auburn-LSU game and Oxford, MS for the Alabama-Ole Miss game. There, theyll sip bottled water, fire up gas generators for large-screen TVs, satellite dishes, and other electronics, and cook and eat enormous amounts of food. These are decent people, of course, so they will say a prayer for people dealing with Florence-related destruction and maybe even give a few dollars or a pint of blood to help with the relief efforts.
Crucially, though, the fact that prices in disaster-affected areas arent allowed to adjust means they wont get the signal that tells them use less gas, drink less bottled water, and maybe sell your generator because people in South Carolina might be willing to pay more for it than you are that rising prices would provide. As at least one popular textbook puts it, rising prices are a signal flare telling people bring more resources! Price gouging laws mean the signal flares never go up.
Importantly, the higher prices send valuable information to people who may not even know there has been a storm. Someone on the other side of the world need not know that there has been a disaster and that, therefore, a lot of people need emergency supplies in the Carolinas. She just needs to see that the price of gas has gone up just a bit in order to adjust her behavior accordingly.
To add insult to injury, price gouging laws dont reduce what people pay for gas, bottled water, and so on. They just change how they pay for the now-artificially-scarce goods. They cant pay with money, so they pay with time. And since theyre not actually producing anything while theyre standing in linethey could be clearing out trees, doing repair work, or any of a host of other thingsthe time they spend in line is pure waste.
As if to inadvertently make the case against price going, one report emphasized long lines and empty shelves. Those lines wouldnt be so long and those shelves wouldnt be empty if officials didnt prevent prices from adjusting to reflect emergency conditions on the ground.
As I write this, several states have declared states of emergency in anticipation of what will apparently be a very large, very destructive storm. Wisely, people are getting out of the storms way. If we were really wise, we should also eliminate laws like those against price gouging that stand in the way of goods and services moving toward where they are most highly valued.