Politics

After Harvey, Economists Offer Defense of ‘Price Gouging’

Experts warn well-intentioned laws regulating costs of goods can make things worse for storm victims

As the floodwaters from Hurricane Harvey recede, Texas Attorney General Ken Paxton has shifted attention to a favorite target during all natural disasters: price gougers.

The Texas attorney general’s office has received 2,000 complaints, CNN reported. One convenience store reportedly was selling gas for $20 a gallon and water for $99 a case. Paxton has issued stern warnings.

“We haven’t had a market in Houston over the last week … In those certain situations, when we’re dealing with commodities and things that are necessities to people during a crisis, you can’t overcharge,” he told CNN’s Michael Smerconish over the weekend. “And so those are the things we’re looking at.”

[lz_third_party align=center includes=”https://www.youtube.com/watch?v=3Xr-NFNuDb4″]

But many economists argue that laws against price gouging, while well-intentioned, actually do more harm than good. They argue that the law of supply and demand operates the same whether the economy is experiencing normal times or has been impacted by a disaster. Regardless of the circumstance, when the government artificially suppresses prices, shortages inevitably result.

“We call it a law for a reason,” said Art Carden, an economics professor at the Samford University in Birmingham, Alabama. “No government is powerful enough to repeal it, and no hurricane is strong enough to break it.”

Do you support individual military members being able to opt out of getting the COVID vaccine?

By completing the poll, you agree to receive emails from LifeZette, occasional offers from our partners and that you've read and agree to our privacy policy and legal statement.

Carden noted he is not just a heartless economist; his sister, he pointed out, lives in Houston. But he said letting prices temporarily shoot up is better in the long run because it acts as a “signal flare” to suppliers far and wide that a particular area needs more resources.

Gasoline wholesalers or plywood businesses or contractors might not take on the hassle and risk of a long trip from outside the disaster area, Carden said, if they can make only a small markup over what they can earn at home. But he added that the lure of a big payday likely will draw them. The sudden influx of supply pushes the price back down.

“If you continue to charge the old price, you will run out of gasoline. This becomes a life-and-death situation.”

“It’s counterintuitive. And this is probably one of the reasons people hate economists,” he said. “If we want to be really, really, compassionate — and not just make our friends happy on Facebook — we have to talk really hard about changing incentives.”

High prices also temper demand, according to experts.

“It forces people to make very careful decisions about how they use their resources,” said Steve Horwitz, the Schnatter distinguished professor of free enterprise in the Department of Economics at Ball State University.

Christopher Westley, who teaches at the Lutgert College of Business at Florida Gulf Coast University, said when demand spikes for gasoline after a hurricane at the same time that the supply has been disrupted, only one thing can happen.

“If you continue to charge the old price, you will run out of gasoline,” said Westley, who also is an associated scholar at the libertarian Mises Institute. “This becomes a life-and-death situation.”

That is because people most in need of the gas — and the most willing to pay a premium — may not be able to get it. Westley offered the example of someone who needs to keep a generator going in order to power a lifesaving medical device. Meanwhile, someone who might fill up not only his car but his lawnmower at the normal price is more likely to conserve once the price shoots up.

Carden said the principle applies to any good or service. If the government artificially holds down the price of hotel rooms, a family might rent two rooms. That will leave some evacuees with no rooms. But if the price doubles, that same family may rent only one room, leaving the other for another family.

Carden said prices also are a much more efficient way to determine how goods and services are allocated. He said that when artificially low prices and limited supply inevitably creates shortages, it results in long lines. It is not uncommon to see cars snaking down the block waiting for a few gallons of gas. A region hit hard by a storm or other natural disaster would recover faster if people did not waste time waiting in lines or searching for items, and could instead spend time and energy cleaning up and rebuilding.

A gas-station owner dealing with his own storm damage might decide that it is not worth it to even open his business at pre-storm prices. But the chance to make two or three times as much money might change the calculus, according to economists.

Experts say most Americans understand the concept in non-disaster contexts. Heavy-handed controls on the economy imposed by Venezuela’s socialist government, for instance, have resulted in shortages of food, medicine, and other basic needs. If farmers suffer a bad corn harvest one year, people understand the result is that corn-based food will be more expensive.

After a hurricane, these changes occur much faster.

[lz_related_box id=”838057″]

“But the economics is the same,” Westley said.

Horwitz agreed but argued, “It’s even more important during emergencies.”

Economists said the government could still play a role. Carden said he favors government handing out vouchers or cash rather than physical goods. Horwitz said the government can help the most vulnerable victims who could not otherwise afford to pay more for basic goods at higher prices. That is better than trying to control the prices themselves, he said.

To people who believe it is unfair to take advantage of a disaster, Horwitz said, “Then you still have to answer the question that it doesn’t change the facts on the ground.”

Westley acknowledged that laws against price gouging are broadly popular in states that tilt Democratic and Republican alike.

“To the extent that public officials pass these laws,” he said, “it’s only because the median voter hasn’t studied economics.”

(photo credit, article image: Forest Guardians, Wikimedia)

Join the Discussion

Comments are currently closed.