As the northeastern United States continues to
recover from Hurricane Sandy, we hear the usual outcry against
individuals and companies who dare to charge market prices for goods
such as gasoline. The normal market response of rising prices in the
wake of a natural disaster and resulting supply disruptions is redefined
as “price gouging.” The government claims that price gouging is the charging of ruinous or exploitative prices for goods in short supply in the wake of a disaster and is a heinous crime But does this reflect economic reality, or merely political posturing to capitalize on raw emotions?
In the wake of Hurricane Sandy, the supply of
gasoline was greatly disrupted. Many gas stations were unable to pump
gas due to a lack of electricity, thus greatly reducing the supply. At
the same time demand for gasoline spiked due to the widespread use of
generators. Because gas stations were forbidden from raising their
prices to meet the increased demand, miles-long lines developed and
stations were forced to start limiting the amount of gasoline that
individuals could purchase. New Jersey gas stations began to look like
Soviet grocery stores.
Had gas stations been allowed to raise their prices
to reflect the increased demand for gasoline, only those most in need
of gasoline would have purchased gas, while everyone would have
economized on their existing supply. But because prices remained lower
than they should have been, no one sought to conserve gas. Low prices
signaled that gas was in abundant supply, while reality was exactly the
opposite, and only those fortunate enough to be at the front of gas
lines were able to purchase gas before it sold out. Not surprisingly, a
thriving black market developed, with gas offered for up to $20 per gallon.
With price controls in effect, supply shortages
were exacerbated. If prices had been allowed to increase to market
levels, the profit opportunity would have brought in new supplies from
outside the region. As supplies increased, prices gradually would have
decreased as supply and demand returned to equilibrium. But with price
controls in effect, what company would want to deal with the hassle of
shipping gas to a disaster-stricken area with downed power lines and
flooded highways when the same profit could be made elsewhere? So
instead of gas shipments flooding into the disaster zones, what little
gas supply is left is rapidly sold and consumed.
Governments fail to understand that prices are not
just random numbers. Prices perform an important role in providing
information, coordinating supply and demand, and enabling economic
calculation. When government interferes with the price mechanism,
economic calamity ensues. Price controls on gasoline led to the infamous
gas lines of the 1970s, yet politicians today repeat those same failed
mistakes. Instituting price caps at a below-market price will always
lead to shortages. No act of any legislature can reverse the laws of
supply and demand.
History shows us
that the quickest path to economic recovery is to abolish all price
controls. If governments really want to aid recovery, they would abolish
their “price-gouging” legislation and allow the free market to
function.
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