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.