Download Price gouging Laws Still Hurt Storm Victims

Price gouging Laws Still Hurt Storm Victims
Sep.
1 2011 - 1:55
A few things tend to follow on the heels of hurricanes. The first and most obvious is a
period of recovery for those affected by the storm. The second is, inevitably, a series
of public comments saying something to the
effect of “cheer up, at least it was good for the
economy!” (no, it wasn’t). The third is a series of
Price gouging is a pejorative term
referring to a situation in which a
press releases and news stories condemning
seller prices goods or commodities
“price gouging.”
much higher than is considered
And so it went with Hurricane Irene. Here’s one
example in which New York Attorney General
Eric T. Schneiderman promises vigorous
enforcement of price-gouging laws.
It is easy to focus on a price we don’t like, but the
price is merely the outcome of a much more
complex series of interactions between buyers
and sellers. Legislatures can pass laws against
higher prices, but high prices aren’t the problem.
High prices encourage others to help us fix
problems.
reasonable or fair. In precise, legal
usage, it is the name of a crime
that applies in some of the United
States during civil emergencies. In
less precise usage, it can refer
either to prices obtained by
practices inconsistent with a
competitive free market, or
to windfall profits. In the Soviet
Union, it was simply included
under the single definition
of speculation. – Wikipedia, Sept
2011
In an emergency situation,
information about the scarcity
and urgency of need for
different goods and services is
at a premium. Very generally,
information about changing
market conditions will be
transmitted to everyone else
through rising prices. By
outlawing big changes in
market prices, we are
essentially cutting off the flow of information.
And what are the consequences? Price controls create shortages. When we hold the
price of gasoline below what the market will bear, we create an artificial gap between
the number of gallons buyers want to buy and the number of gallons sellers are
willing to sell.
Think about that when you see pictures of people lined up for gas or groceries after a
disaster. Buyers will pay for gas with a combination of their money and their
valuable time. Every person in a gas line or a food line could be doing something else
with his or her time. Wealth evaporates and recovery is delayed while people stand
in line.
The law of demand tells us that people will want more of something at lower prices
and less of something at higher prices. The law of supply tells us that people will
supply less of something at lower prices and more of something at higher prices.
When markets are left to their own devices, people will bargain with one another
until what they reach prices at which what people are willing to purchase equals
what others are willing to sell.
This isn’t so when prices are held artificially low. Potential suppliers of gasoline,
bottled water, batteries, flashlights, and plywood could also be doing lots of other
things with their time and energy. When prices are held artificially low, they have
weaker incentives to bring these goods into the affected areas. If we allowed prices to
fluctuate freely, we would see people moving disaster relief supplies from unaffected
to affected areas more rapidly.
For example, higher gasoline prices in affected areas in the Northeast would
translate into higher gasoline prices in unaffected areas (like Memphis) as profitseeking gasoline suppliers look for the highest returns on their investment. Higher
prices in Memphis tell me and everyone else in town to conserve because the gas
we’re thinking about buying might be more valuable elsewhere.
When I wrote about price gouging in June, I proposed an “iron law of intervention:”
“if you want to make a problem worse, pass a law to fix it.” Prices convey information
about scarcity, wants, goals, and values. Arguably, disaster situations are when they
might be needed most. By preventing the price mechanism from working, we make
disasters worse than they already are.