I have a feeling that politicians secretly love natural disasters. It's difficult to conceive of a better opportunity to appear on front pages with brows furrowed by heartfelt concern and to express generosity by dishing out other peoples' money.
Florida’s Governor and Attorney General (the impeccably tanned “Chain-gang” Charlie Crist) took Dennis' sudden arrival as an opportunity to offer stern warnings to various and sundry evildoers: Price gouging for essential goods and services will not be tolerated!
While such grandstanding appeals to the crowd, the tragic reality is that price controls inevitably create more suffering and hardship. This economically indisputable fact is probably not lost on Messrs. Bush and Crist, both of whom are smart fellows. Unfortunately for the citizenry, that this truth is not widely known (or more tellingly, not widely communicated) ensures that opportunistic politicians will continue to impose hardships in the name of compassion.
Reasons cited for the support of price controls appeal to one's sense of what is just and proper. That it is morally wrong to profit from another's loss. That wealth or its absence should not play an inordinate role in permitting access to life's necessities. I hold these sentiments myself. Ironically though, these well-intentioned sentiments ensure that need and want may surely be prolonged and intensified when the unscrupulous use them to justify interference in commerce.
In times of marked and localized shortages of some good, a price increase driven by elevated demand and reduced supply acts as an incentive to those with access to the good to deliver it where scarcity exists. This is arbitrage. For example, if damage or contamination causes a scarcity of potable water in a disaster-struck region, the demand for bottled water will increase. The resultant, natural increase in price provides significant incentive to suppliers to meet this new demand.
While it may appear to be profiteering, the increased profit potential is essential. It offsets costs related to the acquisition, transportation, and distribution of water. It also offsets the risk of financial loss, should the market price drop due to a sudden glut of supply (due to quicker suppliers) or a drop in demand (due to infrastructure repairs). Price increases may encourage those who were wise enough to stockpile prior to the disaster to sell some of their water – perhaps even at some risk that they themselves might have to buy more later on. Without the potential for economic gain to offset risk, someone could go thirsty a stone’s throw from another individual with gallons of extra water in their pantry.
Consider the necessity of shelter for a moment. One tends to think of the supply of shelter as a constant. Thus, the indignation at the notion that some callous soul could be so heartless as to overcharge for lodging. However, as the prices of hotel rooms in the vicinity of a disaster naturally increase, some seekers will opt to drive farther. They'll find a room down the road at a price they consider acceptable. The increase in cost effectively increases supply by expanding the geographical region within which people will search. Someone who needs to be closer will pay the premium for the nearer room. The tragedy of price controls is that access to necessities becomes dictated largely on a first-come-first-served basis. If the price for the nearby room is no different than one farther on, there is no incentive for someone who can afford to be farther away to keep driving. The family that really needs to be close, but shows up ten minutes later, is out of luck.
On the demand side, increased costs reduce unnecessary consumption. If it's cheap, someone might buy twice as much water as they need. If it were expensive, a more pragmatic evaluation would leave a couple gallons for the next guy. A family with children might rent two rooms at a standard rate but only one at a higher cost. The other room would remain available for another family. Consider an extreme case where scarce water is given away freely. In such a situation, rationing would have to be put in place to arbitrarily limit demand because there would be no adverse effects from over-consumption! Without limitations, the first people to show up might very well cart all the water off for themselves.
Price controls don't help people, and our elected leaders are savvy enough to know this. They are an encroachment on the freedom of the individual to make choices based on circumstance. The choice to invest money in bulk water in hopes of selling it at a profit. The choice of paying extra for a hotel room – or driving on to your sister's house two hours away. The freedom to make these choices are not by right the state's to rescind. Price controls reward poor behavior and planning, and punish the sensible among us. They create arbitrary and unnatural, but no less inequitable patterns of consumption than a free market in goods would provide. The only certainty is that they provide the state with greater power over the common man, and justification for state intervention (to correct need and hardship that the state itself has created). For the victims of our next hurricane, the choice between the free market and price controls may prove to be the choice between expensive water or a pocketful of dollars you can't drink.
July 16, 2005
