The people of Houston and much of Texas are suffering today, with homes and businesses being hit by ongoing rain and flooding from Tropical Storm Harvey.
One political attempt to help natural-disaster victims like these is laws against “price gouging,” like Texas’s Deceptive Trade Practices-Consumer Protection Act. The intention of such laws is to prevent companies that sell bottled water or other urgently needed items from taking advantage of customers in a crisis.
Texas gets many things right in my opinion, but this is not one of them.
The invisible hand of the market reaches out to help people in a disaster, but anti-gouging laws cut it off at the wrist.
Why do sellers “price gouge” in a disaster?
Price gouging is when a seller charges “too much” or an “exorbitant” price, especially after a natural disaster or other unexpected event. But what exactly do “too much” or “exorbitant” mean?
Prices rise when supply goes down or demand goes up.
Both factors are in play when hurricanes strike. Demand goes up for particular goods, of course — emergency supplies like gasoline, water, and canned foods. And the storm also disrupts the ability of sellers to supply the goods people want, because roads get washed out, factories get damaged, etc.
But these higher prices are actually beneficial for the public, for two reasons:
- They force customers to economize and buy only what they truly need. In normal times, people buy goods in predetermined quantities (i.e., I know what I usually need in terms of milk, cereal, etc.). But in times of disaster, people tend to buy much more, “just in case.” Higher prices mitigate that effect, and thus free up resources for other consumers in need.
- The higher prices encourage suppliers to bring in more of those desperately needed goods and services to the affected areas.
In effect, higher prices serve as signals for help. Unfortunately, the good intentions of Texas politicians, embodied in this law, will cause static and make it harder for Texans to get the help they need.
Does a business owe you supplies?
Beyond the positive economics (the neutral analysis) we must not neglect the normative (the value or moral judgment). The anger we often see toward businesses that raise prices implies that customers believe it is their right to get certain goods and services; they believe they are owed those goods and services. But it is pure arrogance to assume that customers are entitled to the private property of business owners, especially at a particular price.
It’s also interesting that when citizens protest the new price they are implying that the previous price was fair and appropriate. As Henry Hazlitt wrote in Economics in One Lesson, “That starting or previous price is regarded as ‘reasonable,’ and any price above that as ‘unreasonable,’ regardless of changes in the conditions of production or demand since that starting price was first established.” But there are no objective criteria for whether a price is exorbitant or excessive. In essence, anything above a zero price is arguably gouging.
The pure free-market view is that nobody is entitled to the property of others. Texas, a state that prides itself on its conservative values, forgets that it is an immoral intrusion by the government to interfere with the free market and the price system. The same politicians who argue for free enterprise become hypocrites when they call for price-gouging laws.
Facts should trump feelings. The fact is that when the government interferes with the laws of supply and demand through price controls, citizens are harmed.
One of the first lessons in any good economics class is that good intentions do not necessarily lead to good outcomes. So, while it may appear to be compassionate on the part of politicians to prevent higher prices during or after a disaster, nobody is as harmed by that compassion as disaster victims.