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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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