Laws Against Price-Gouging: Well-Intentioned, But Always Wrongheaded

Laws Against Price-Gouging: Well-Intentioned, But Always Wrongheaded
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Hurricanes create a great deal of misfortune and suffering – but they also bring out the best in people. The thousands of volunteers preparing to help Hurricane Irma victims and continuing to help Harvey victims serve as a testament to our willingness to help one another in the worst of times.

Nevertheless, while all of our efforts may be well-intentioned, some of them are deeply misguided. Price-gouging is one such effort. Thought to assist those in a disaster zone, price gouging policies actually wind up harming them, and reflect a misunderstanding of the roles of prices in the economy.

In the case of a natural disaster, it is important to get resources and products to those in need. How is this most likely to come about? It is certainly not by interfering with the price signal and reducing the incentives of producers to get vital products to the disaster area. Rather, it is by letting prices move to reflect the changing demand and supply of goods and services.

Suppose your mother lives in Florida and her house has been destroyed. She is living in a shelter and, along with 9,000 other people in the shelter, she needs water to drink. Is the best way to make sure she gets water to say that the price of bottled water cannot be greater than it was before the hurricane?

Not really – what she and her fellow Floridans really need is an increase in the supply of bottled water sent to her shelter. Suppose the water was $5 per case at the time of the hurricane. Unable to get drinking water from her faucet, your mother will surely want to buy more water than she did before she ended up in the shelter. This will be true of the other 9,000 people in the shelter as well. However, due to the flooding of stores and production facilities, there is less bottled water available in the hurricane area than there was before it struck.
Getting enough water to your mom’s shelter to satisfy the needs of all 9,000 residents requires moving water from other areas. But because less bottled water is being produced in Texas, it must be transported from other areas, delivered and distributed. It also means that more bottled water must be produced, since the demand for bottled water in other areas not hit by the hurricane will not be reduced.
Now, we could rely upon the good graces of those who own the bottled water companies to produce more bottled water at the same price as they were before the hurricane. And we could rely on transportation companies to donate their trucks, and companies that coordinate the delivery of products to donate their services to get the water to the venues that need it, and volunteers to work to distribute it at the facilities.

Unfortunately, all this means relying on the willingness of a very specific subset of individuals to undertake a particular activity – and it is very unlikely that their willingness will result in meeting the exact needs of the shelter your mom is staying in.
Suppose that we let the price of bottled water rise. This will incentivize companies to produce more bottled water, and to transport and deliver it. And as the price rises, those who value water less than your mother will reduce how much they demand, leaving your mother with the chance to buy the water she needs.

The objection, of course, is obvious: Your mother is indigent and just lost all her possessions. She shouldn’t have to pay $20 per case for bottled water that a week earlier only cost $5.

The problem with this argument is that it is approaching your mom’s situation from the wrong direction. Trying to solve her problem with a price gouging law will result in most of the people in her shelter not getting water. The solution is instead to have people donate money to agencies that buy the water at $20 per case and give it to your mom.

Many corporations, aware of these economic realities, have taken the lead in relief efforts. Walmart, for instance, has donated $10 million to match donations to the Red Cross. More water will be available to people at the shelter using this approach than by limiting the availability of goods and services through price gouging laws. There’s no denying it’s counter-intuitive, but it’s ultimately the most compassionate response.

Gary Wolfram is a professor of economics and public policy at Hillsdale College.

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