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Supply and Demand During Natural Disasters

Photo Credit: Staff Sgt. Daniel J. Martinez

In the wake of Hurricane Harvey, help has arrived and resources are pouring in to aid those affected by the storm, but some say that the store owners are taking advantage of the residents of Houston. Price gouging is a real concern for the survivors of Hurricane Harvey, but could price controls create a larger problem for the economy? A basic law of supply and demand will help us understand the broader picture.

The simplistic idea of economics tells us that if a good is in demand, then the price increases. Likewise, if the good is also in short supply, then the price increases more. Nevertheless, if the price goes above the market value, this will result in people refusing to buy the product, or at least be more conservative with their money in other areas. This basic concept of market price explains the high price of gas, water, and other goods currently being sold in and around Houston, Texas. Ludwig Von Mises stated that “[market price] refers to the special conditions of the concrete act of exchange. It is ultimately determined by the value judgments of the individuals involved.” However, there is a complaint being purported by the Left that says this is a form a price gouging.

In response to the storm heading their way, AG Jeff Landry of Louisiana has forbid price gouging for the time being, which could last up to 30 days. The idea is that in the aftermath of Katrina, Louisiana knows best on how to handle the economics of this type of natural disaster. If people need supplies, then raising the price will be unfair to them. Why can’t they just be sold for their standard market value? Perhaps they could just be free. After all, it’s just businesses and corporations being greedy. While this is an easily misconstrued way of thinking by someone who has very little understanding of economics, it is just as easy to correct.

In times of disaster, people panic and make rash decisions. Alberto Cavallo, Eduardo Cavallo, and Roberto Rigobon wrote in their article, Prices and Supply Disruptions During Natural Disasters:

“Demand shocks are linked to the panic that consumers may experience after natural disasters, with people rushing to the stores to purchase basic necessities and hoard goods that they fear could become unavailable in the days to come.”

Imagine that at the break of Hurricane Harvey, or maybe right at the start, you decided to go get water for your family. You rush to the store only to find that someone has bought every single $5 case of water. Now, no one else can have potable drinking water until more is in stock, disaster assistance arrives, or you find someone who is willing to lend you some of theirs.

Now say the price of a case of water was $35. This would result in the person stock piling water not being able to buy every case on the shelf, leaving more cases available for people who weren’t as quick to get to the store. Granted, $35 isn’t the most ideal price for a case of water, but the idea that the availability of expensive water trumps the having none at all.

Now think about the surrounding areas, like Louisiana. Say you need wood to rebuild your home, but there is none to be found in Houston, causing you to look to Louisiana. However, in Louisiana people have been renovating and purchasing wood for other projects. Well, it would make more sense to allow the price of wood in Louisiana to raise so that people will be discouraged from making those purchases. In turn, this would create more supply that could be transported to Houston in order to fulfill their demand. Also, there is the idea of greediness. Is the guy who has a family of four, making $30k a year going to buy a truck load of wood and pay for it to be shipped down? Maybe, but I would still put my money on the rich guy. Well shouldn’t he just give all that wood away because he is so rich? No, how do you think he got rich? Probably not by giving it away at every turn. Still, numerous rich and poor alike have given what they can to such a cause. Most recently this can be seen by President Trump’s $1 million donation and Arnold Schwartzenegger’s $100,000 to JJ Watt’s fundraiser that has now surpassed $18 million. Just as much as basic economics, charity is also interwoven into natural disasters like these.

Donating has been greatly encouraged and should be pressured by society, but using price ceilings to artificially control the market doesn’t help the economy. CNBC reported that Jim McIngvale’s Furniture Gallery willingly opened it’s doors to hurricane survivors. Capital Gazette wrote about several businesses outside of Texas, such as Fleet Feet Sports, Maryland Performance Diesel and the United Church of Christ of Annapolis, that have donated supplies for relief. These people, companies, and organizations didn’t need to be forced to do what was right and help others. The idea that everyone is automatically entitled to a store owner’s supply, or a pastor’s church is ridiculous. Nevertheless, we should call people out for horrid behavior but also let the market work naturally as it creates room for people to have access to what they need whether it is through charity, or supply and demand.

Follow the author on Twitter: @ferrenburgrocky

 

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