How many people see natural disasters like the tornadoes in Tuscaloosa, Alabama, and Joplin, Missouri, and say, we should be working to impede the recovery and make life harder for storm victims? Probably no one. How many people see prices rise after natural disasters like the tornadoes in Tuscaloosa, Alabama, and Joplin, Missouri, and say, we should prosecute price gougers!? Probably a lot. And yet prosecuting price gougers makes life harder for storm victims.
Why do prices rise so radically after storms? Theres a three-word answer: supply and demand. After massive storms, demand for tree removal services rises. Demand for building supplies rises. Demand for electric generators rises. Demand for basic groceries rises.
At the same time, supply of these goods and services might be falling. First, some of them might simply be destroyed. If a tornado knocks out a shopping center, a handful of grocery stores, all the hardware stores, lumber yards, and a handful of construction companies, we simply have less stuff to go around.
Second, the people who might provide the goods and services essential for disaster relief might have problems of their own. If its a contractor from the affected community, then he might be dealing with the destruction of his own property. People from outside the affected area have their own crises to deal with. I forget where I first read this, but someone has wisely pointed out that in post-disaster situations rising prices perform vital economic triage by showing which uses of resources are now high-value and which uses of resources are now low-value.
A disaster means a big shock both to what people want and to the resources available to fulfill those wants. Freely-moving prices make sure resources are allocated to their highest-valued uses, and rising prices send people a very important signal: resources have gotten scarcer and need to be conserved. If houses are destroyed by a tornado, rising lumber prices tell someone in an unaffected area to think twice about building a new deck because the lumber is probably more valuable rebuilding houses. Rising gas prices tell people to think twice about burning scarce gas for a Sunday drive in the country. And so on.
Ive come to think that there is an iron law of intervention: if you want to make a problem worse, pass a law to fix it. Price controls create shortages: when the price isnt allowed to rise to coordinate the wants of buyers with the wants of sellers, shortages result. The cruel irony is that any benefit for those we are trying to help is frittered away because people who arent allowed to pay for something with their money will pay for it with their time. Passing a law doesnt change what someone is willing to pay, but it changes how they pay.
Suppose the price of a gallon of milk is normally $3 but would shoot up to $10 after a tornado. Suppose the government passes a price gouging law saying that people arent allowed to raise prices by more than 25% once a disaster has been declared. A grocery store raises the price of milk to $3.75. If Bob values his time at $6.25 per hour, he will be willing to pay for the milk by waiting in line for an hour to pay $3.75. Notice that while hes waiting in line, hes not fixing his house or working. His valuable time simply disappears.
Michael Giberson explains the economics, ethics, and history of price-gouging laws in the cover story from the Spring issue of Regulation on The Problem with Price Gouging Laws. Some argue that there is more to life than economic efficiency, and I certainly agree. However, price-gouging laws compound the already-onerous burden on people who are affected by natural disasters by creating shortages, which Giberson calls a result that suggests neither shared sacrifice nor promotion of a common good.
Naturally, the disasters and price-gouging witch-hunts have been accompanied by outrage from activists and politicians as well as platitudes about how we should work together. Outrage is always cheap, disaster or no disaster, but a storm victim cant rebuild a house with your anger. That requires labor, and it requires resourceslabor and resources that dont materialize when the price isnt allowed to rise.
Art Carden is a Research Fellow at the Independent Institute in Oakland, California, and Assistant Professor of Economics at Samford University.
Full Biography and Recent Publications