Let the Market Work,
Especially During Disasters
by John R. Lott, Jr.
by John R. Lott, Jr.
Distraught over the loss of their homes from Hurricane Charley, some Floridians have turned their anger on "price gougers." $8,000 for removing a fallen tree from a yard? $5 bags of ice? $3 for gasoline? Newspapers carry stories of an 80-year-old woman who was told when she first called a hotel that a room cost $45, but by the time she called back it was going for $61. How can anyone justify such prices?
By Wednesday, almost 1,900 price-gouging complaints had been filed with the state Attorney General's office for everything from hotel rooms to gas to lumber to ice. Governor Jeb Bush denounces these higher prices as "horrific." Republican state Attorney General Charlie Crist started bringing some suits within a day of complaints.
But to the extent that government successfully suppresses prices, it is Floridians who will suffer, not just now but after future hurricanes as well.
Higher prices force people to economize, create incentives for companies to provide more and do it quickly, and make sure that people who value products the most get them. Do we really want to show up at the store and find nothing there?
$8,000 for a fallen tree might seem extreme, but homeowners have an alternative: wait a couple of weeks. Right now fallen trees are all over the place. There are more trees than there are people to remove them. Some fallen trees are more dangerous than others and should be removed more quickly. If prices are not allowed to rise above what they were before the hurricane, people who should wait, and save a few dollars, won't.
People will be more sparing with how they use a $5 bag of ice than if they cost $1. Without air conditioning and refrigeration, everyone during August in Florida wants ice. But at a dollar a bag, stores would find themselves quickly sold out. The first people at a store will take bags even if it means just lowering their temperatures from already comfortably cool levels to cold.
No one wants their grandmother to pay more for a hotel, but we all also want to have our grandmothers have some place to stay. As the price of hotel room's rise, some may decide that they will share a room with others. Instead of a family getting one room for the kids and another for the parents, some will make do with having everyone in the same room. At high enough prices, friends or neighbors who can stay with each other will do so.
You would think that people had learned their lessons about price controls during the 1970s. Price controls don't stop the cost of goods from rising. They just change how we pay for them. Chronic shortages of gasoline had Americans waiting in lines for hours. We seemingly tried everything. California adopted a rule that limited people's purchases to those days when the last digit of their license plate coincided with whether the calendar date was odd or even. Yet, the supposedly permanent shortages disappeared instantly as soon as Ronald Reagan removed price controls.
There is another side to this problem. Companies in states all across the south, hoping to make a few dollars, loaded up their trucks with food, water, and generators. The higher the prices, the faster these "greedy" companies and individuals got their products down to customers. But their greed meant less suffering. The more products delivered, the less prices rose.
Yet, it is not just current customers who suffer from these "temporary" price controls. Victims of future hurricanes face a rougher time as well.
Why do grocery stores decide how much food to keep in inventory? One reason is the oft chance that some future disaster dramatically and quickly increases demand. The more a disaster might create shortages and raises prices, the more it will pay for a grocery store to add in that additional refrigerator.
The refrigerator, space, and inventories cost money. If the storm doesn't hit, they will have extra food they won't sell. Take away the chance to cover these costs and companies won't make those investments.
What about the poor? Making the companies pay for others' altruism not only creates the wrong incentives, it is also unfair. If we need to help out, make everyone pay. In any case, by Tuesday, the federal government was already handing out money so people could buy food and rent hotel rooms.
We'd all like lower prices, not just during disasters, but all the time. Yet, banning price increases doesn't solve the problem, it only hides it.
Bashing companies may be profitable short-term political behavior, but, unfortunately, these same politicians probably won't be around to accept the blame for the greater problems these regulations create down the road.
August 25, 2004
Copyright © 2004 John Lott