Governments from the Gulf Coast to California are urging investigations of price-gouging, but gas, hotel, water, and other price increases after Katrina are not a moral failing by companies. They are an economic necessity.
Price increases mitigate the shortages that occur after natural disasters by redirecting supplies and giving an incentive for individuals to conserve resources. Unfortunately, the stories of shortages and gas lines that fill newspapers after disasters are a product of governments misguided attempts to prevent gouging. Since raising prices in the face of sudden scarcity is considered illegal gouging in twenty-three states, merchants have a reduced incentive to open stores or ship groceries, water, and emergency supplies to where they are most urgently needed. Even those who wish to keep their doors open as an act of service have their attention diverted from core business in order to control lines and ration the supplies they do have.
Compare this to an alternate scenario in which prices are allowed to move freely, i.e., where "gouging" is legal. People who usually sell food, water, generators, and medicine to areas not hit by Katrina, like the west coast or northeast, would instead direct their supplies southward in anticipation of higher prices. Gas stations and stores that close early under anti-gouging laws would remain open and fresh supplies would be shipped in to take advantage of the higher prices.
Perhaps most importantly, people buying emergency supplies will be compelled to only take what they need and be more judicious in their consumption of food, water, gasoline, and other suddenly scarce resources. Retiree Neil OBrian put it clearly in a Los Angeles Times interview: I think its terrible. When you start filling the tank for $50, it makes you think if you can do without some things. His personal opinion aside, this is exactly the type of conservation that is necessary after Katrina. People think twice about unnecessary driving when gas prices rise dramatically.
Similarly, in Texas, according to a spokesman for the state attorney general, they were investigating low-end motels that doubled prices in response to increased demand from Louisiana refugees. But these higher hotel prices encourage families to rent one room where they might have rented two, leaving more rooms for other hurricane victims. Letting prices increase is the most effective way to encourage people to conserve the resources that have become scarce because of Katrina.
The anti-gouging movement is also dangerous because it creates a large class of arbitrarily defined crimes. Alabama law defines gouging as an unconscionable increase in prices. After a gas-wasting drive around his neighborhood, Fred Upton (R-MI) said that his sense is the supply and demand equation does not fit a 60-cent increase in gas prices. What does fit? A 59-cent increase? 58? Maybe 56 but not 57? Where do we draw the line between a conscionable and an unconscionable price increase? Florida attorney general Charlie Crist said, We will be vigilant for reports of anyone going unconscionably beyond the normal economics of supply and demand, and we will fully investigate any such occurrences. But the price increases Mr. Crist so despises are the normal economics of supply and demand. Neither he nor any other government official knowsor can knowthe appropriate post-disaster price of gas or any other commodity.
Other officials, including President Bush, have condemned gouging and urged conservation in the same speech. However, it is precisely the higher prices that occur in response to disasters that encourage the conservation of scarce goods. While private charity and good will are important after a disaster, we must also recognize the need to harness individual incentives to promote the common good as well. That means letting prices adjust to reflect the new economic realities that Katrina caused. Pretending that market conditions havent changed by limiting price increases will only inflict additional shortages on storm victims.
Governments enact anti-gouging ordinances to protect disaster victims, but the ordinances only lead to shortages of essential goods and lengthen the amount of time it takes to recover. Katrina was a horrific disaster, but government bungling with market prices can only compound the misery.
Art Carden is a Research Fellow at the Independent Institute in Oakland, California, and Assistant Professor of Economics at Samford University.
Full Biography and Recent Publications
Benjamin Powell is a Senior Fellow at The Independent Institute, Director of the Free Market Institute at Texas Tech University, and former President of the Association of Private Enterprise Education. Dr. Powell received his Ph.D. in economics from George Mason University. He has been assistant professor of economics at San Jose State University, a fellow with the Mercatus Center's Global Prosperity Initiative, and a visiting research fellow with the American Institute for Economic Research. Benjamin is also the editor of Housing America: Building out of Crisis.
Full Biography and Recent Publications