This is a question that I hope to address in this post.
Price Gouging
In the wake of Hurricane Katrina, Attorney General Jim Hood received thousands of complaints of "price gouging" by stores, hotels, and gas stations that were charging far higher prices than usual during this coming emergency. In Florida, it is illegal for a private company to charge much more during an emergency than the average price over the previous 30-day period. I know what you are thinking.. Right on! Finally, a government intervention that I can get behind. Companies shouldn't be able to "gouge" us when it comes to gas or other essentials.
What if I was to tell you that it is precisely because these "good intentioned" laws are in place that our shelves of bottled water are empty, gas lines form, and people develop hysteria.
Role of Prices
What role do prices play in an economy? What are they for? Well, prices are not arbitrary number plucked out of the air. Prices are determined by a seller in order to recover their costs and force buyers to restrict how much they demand. When either the supply or demand of a product changes, the price of that product necessarily changes. The willingness and ability of buyers and sellers to trade in an open market established what a particular price should be. But, the wisdom of the state changes these facts in an emergency.
Consider a gas station convenience store along a relatively isolated highway after a hurricane. If the price of gas rose extremely high—to the market price of $10—people would only take as much of the expensive gas as they felt they needed, leaving spare gas for others. But if the price is set artificially low at current $3, those that arrive first will fill their tanks “just to be safe.” The same applies for the goods inside the store. Those first on the scene would take, say, five boxes of cereal apiece at a price of, say, $5. But if, due to scarcity, the price of the cereal box instead rose to, say, $95, each customer would likely take only one box. And just because the price increases does not mean that only the rich could afford the cereal. Poorer people could afford the first $95 box they really needed more easily than the rich could afford a second, third, or fifth box they don’t really need. Government-imposed price ceilings cause goods to become unavailable, whereas supplies would otherwise be available at some price.
Examples:
- 1973-Nixon imposed price controls on oil--Gas lines result
- 2000-California Gov. Gray Davis refused to lift controls on electricity--blackouts result
- All rent control schemes
So, in a disaster area like the one MS experienced during Katrina, people are encouraged to take more than they need because the price is artificially low--thus resources are wrongly allocated. You see the same effects in bubbles when you couple a lower than market interest rate set by the Fed during recession, leading to easy money and a flow of capital into markets like dot.coms and housing that eventually pop. But, prices also provide an incentive for capital to flow into markets in positive way. Profit can always provide incentives for entrepreneurs to provide needs while making money. However, suppliers with the resources outside the affected areas most needed to help Mississippians are forbidden because of the artificially low price to not brave the elements, added risk, and looters because there is no incentive to gain profit. Therefore, the very people that the state is trying to help end up becoming victims of "good intentions."
Conclusion
The laws of economics are simple. Just remember: price ceilings cause shortages and price floors cause surpluses (empty water bottle shelves vs. minimum wage laws and higher unemployment among young workers). Trust the free market. It will always produce far better results than central planners in Jackson or D.C.
So, as you stand in line for gas during the winter storm or stare blankly at the empty shelves of water this weekend, just remember it is all courtesy of our government's "good intentions."
Check out this cameo from our AG :)
Blake
