By Branham Culpepper
The arrival of hurricanes Harvey and Irma has brought renewed debate about price gouging after reports of bottled water selling for $99 per case and gasoline at $20 per gallon. Some argue that this practice is despicable and exploitive, yet others counter that it is simply a natural market mechanism acting to move resources where they are needed most.
The Texas attorney general, Ken Paxton, has made his position clear: “Price gouging is illegal, and the Office of the Attorney General has authority to prosecute any business that engages in price gouging after a disaster has been declared by the governor,” states the attorney general’s website; indeed, he can prosecute them, to the tune of $20,000 (plus an additional $250,000 if the victim is 65 or older). He claims to have received over 600 reports of price gouging, including one instance where a case of bottled water sold for $99. However, some academic economists, such as Steven Horwitz of the Foundation of the Foundation for Economic Education, maintain that the attorney general’s efforts to protect Texas consumers are misguided; these supporters of the free market maintain that his punitive efforts will actually harm consumers.
During a natural disaster, demand for many necessities, such as water, food, and lodging, increases dramatically; likewise, the damage from storms and the closure of stores as shopkeepers evacuate creates a sizable reduction in the supply of these goods. These sudden market shocks combine to cause an increase in price for the affected goods, a problem compounded by the growth of technology, as algorithms that manage prices in real time cannot take extenuating circumstances into account. This is a bitter pill to swallow for many, as the thought of profiteers taking advantage of the desperation and destruction that follow a disaster for personal gain is simply unacceptable.
However, these price increases can actually serve a valuable purpose. Prices are the market’s means of allocating resources; goods go to those who are willing to pay the market price. When governments impose price controls (i.e. anti-gouging laws), people must resort to another means of allocating goods, such as a first-come, first-served basis. The problem with this situation is that other systems cannot equal the efficiency of the market in matching those who have goods to sell with those who need them most.
A higher price serves to simultaneously temper increased demand and to incentivize greater supply. With regard to demand, a higher price discourages excessive use of resources; for example, if a family’s house is damaged, but not severely, an increase in hotel prices may cause it to stay with relatives or simply bear through the night in the house, freeing hotel rooms for those who have no other options. Likewise, price gouging discourages hoarding; if a person expects to be without water for an extended period of time, he may try to buy as much water as possible, but a high price encourages him to buy only what he needs, leaving water for other buyers. Paying $42.96 for a case of water is unpleasant, but so is being unable to buy water at all because the store has run out.
On the supply side, an increase in price encourages preparedness; retailers who stocked up on relevant items before a storm strikes gain extra profits afterward, and the amount of these essential supplies available is larger as well. Demand for many things that become important in emergencies is highly variable, and stores do not want to waste valuable inventory space on items they may not be able to sell; price increases create a reward for taking that risk and encourage suppliers to keep these necessities on hand. Additionally, suppliers must brave often dangerous disaster areas and pay larger-than-ordinary costs to bring goods to people who need them after a storm; higher prices incentivize this behavior, causing additional suppliers to make that dangerous trip. This growth in the number of suppliers drives prices back down to normal levels; thus, price gouging can be said to be its own solution.
One important critique of the free-market position has emerged: what happens to those who cannot afford the new, higher prices at all? Whether one values that case of water at $50 is irrelevant when one does not have $50 to begin with. This problem is of particular salience during a crisis, as the goods in question could mean the difference between life and death; given this, how can those without the ability to buy gain access to essential goods? Again, private firms have an answer.
Private enterprises, whether dedicated charitable organizations such as the Red Cross or for-profit entities have been instrumental in responding to hurricanes. Survivors of Katrina remember the instrumental role companies such as Walmart played in helping New Orleans to recover and rebuild. In response to Harvey and Irma, various companies pledged a total of $72 million to disaster relief, with 42 companies contributing over $1 million each. Walmart in particular has dedicated $30 million in addition to trucking in large quantities of supplies and launching a mobile pharmacy to assist with health issues. Airbnb activated its disaster relief mode, waiving all fees the company collects and allowing owners to make their properties available for free. Cellular carriers such as Verizon are offering additional data or waivers of overage charges for customers affected by the recent hurricanes. Delta added seats and waived fees for customers fleeing Hurricane Irma. Even without the lure of profits, these companies have contributed vast resources to ensure that everyone impacted by the storms has access to necessities, regardless of their ability to pay.
Although the spikes in price of many necessities following a natural disaster may strike some as unsavory, in truth these increases serve to ensure that resources are allocated effectively; price gouging laws operate as price controls that harm this efficiency. For the poor, the overwhelming charitable efforts of many firms and individuals can fill the gaps that markets overlook. Policymakers should resist the temptation to moralize about price gouging and instead leave markets free to supply those in need.