How Price Gouging Laws Make Hurricanes Worse

October 2004 -- After being hit by an unprecedented four hurricanes, many Floridians are now used to the drill: When the hurricane is near, line up to buy water, canned goods, ice, plywood, batteries, and whatever else is available; gas up the car and try to find propane and a generator; or perhaps try to drive to an area not threatened by the hurricane. Often, we spend a huge amount of time in line for goods that sell out, or, if we evacuate, we can't find gasoline along the way.

Then, after the hurricane passes, many of us wait days in the dark for the Federal Emergency Management Agency to deliver the most basic supplies, all the while listening—if we have a battery-powered radio or TV—to the continual reassurances of our elected officials that they will be vigilant in cracking down on any price gouging by merchants.

THE MEANING OF PRICE GOUGING

Part of the frustration we feel at these shortages is caused by the very price-gouging laws that our elected officials assure us are for our benefit. Florida is one of about twenty states that prohibit price gouging during emergencies. But the criteria for what constitutes price "gouging" vary widely. And in Florida, it is in the eye of the beholder—specifically, the attorney general, who can prosecute anyone charging a price he deems "unconscionable" in relation to prices in effect during the 30 days before the crisis.

To understand why price-gouging laws contribute to shortages, we must understand that prices are both a means of conveying information about a continually changing reality and a means of causing people to adjust to that reality. An individual who has a clear-eyed view of reality—who is alert to potential dangers and opportunities—has a better chance of coping with emergencies than someone whose mind is a fantasyland of wishes, hopes, and denial. Similarly, a society that is structured to encourage people to deal with reality will have a better chance of coping with emergencies such as hurricanes than one that relies on a mistaken benevolence to shield them from reality.

WHAT WOULD A REPEAL ACCOMPLISH?

What would happen if the prohibition against price gouging were repealed? First, supplies of emergency items would increase. When a hurricane approached, merchants in the threatened area, in anticipation of being able to raise prices, would order more emergency items than they do now and would be willing to pay more for them. Distant vendors, who would receive higher prices, would be more willing than they are now to divert these items from their normal customers to the threatened area. Gas stations along evacuation routes would get more supplies than they do now, as oil companies would divert gasoline from other customers in anticipation of greater profits along evacuation routes. This competitive process would cause supplies to increase, thus helping to dampen actual price increases. The same process would work, albeit with more logistical bottlenecks, after a hurricane, as supplies and reconstruction materials would move into the areas hit hardest.

If the first effect of repealing price-gouging laws is on the supply side, the second would be on the demand side. Consumers, anticipating higher prices, would be less likely to wait until the last minute to buy emergency items, especially those that are usable in the absence of an emergency. This, in turn, would help dampen price increases and shorten waiting lines at the peak of an emergency.

Repealing price-gouging laws would confront people with an admittedly grim reality: Yes, a hurricane is coming, and the value of many items really has increased. But that very process of allowing people to confront reality, rather than attempting to shield them from it, sets in motion the market's own processes for solving the problem, by increasing supplies and encouraging consumers to buy sooner and more carefully.

Yet many people may believe it would be unethical for merchants to profit from the hardship of others. There are three answers to this concern. First, the process described above for increasing supplies in times of emergency would mean that merchants would pay more for products, thus tending to cut their profit margins back toward more customary levels. Secondly, many merchants, wanting to maintain the goodwill of their customers, would refrain from raising prices as much as they could. But lastly, and most critically, the products held by a merchant are still the merchant's justly owned property. Each person is ultimately working for his own livelihood and well-being and does not exist to serve others. The fact that so many in our society serve others so well through mutual, voluntary transactions is a tribute to the vitality of a market economy.

Frank Bubb is a trustee of The Atlas Society.

This article was originally published in the October 2004 issue of Navigator magazine, The Atlas Society precursor to The New Individualist.

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