Jacking up prices is exactly what Texas needs right now.
As Texas continues to recover from Hurricane Harvey, prices in the affected areas have risen dramatically. This practice is widely, and deceptively, called ‘price gouging.’ The weekend after Harvey hit, the Attorney General Ken Paxton received more than 500 complaints of price gouging, including reports of $99 cases of water, quadrupling hotel prices, and soaring gas prices to $10, according to CNBC. Some areas went as high as $20 for a gallon of gas. Yet The Washington Post reported empty shelves that same weekend. Even against assurances from the attorney general, Forbes says stores struggle to keep basic commodities in supply, especially gas. If prices are so high, why are so many people buying so much? This fact demonstrates a key fact about a market economy and the truth about this so-called “price gouging.”
The debate arises every time a natural disaster occurs. After Katrina, Sandy, Matthew, or really any damaging phenomenon, businesses attempt to increases their prices and the rest of society yells extortion. It is simply unfair for business to take advantage of people’s dire needs. Texas has a law against price gouging, and the practice has received explicit condemnation from the Attorney General, saying “These are things you can’t do in Texas. There are significant penalties if you price gouge in a crisis like this.” He has now taken action to back up these words, filing three lawsuits against companies reported to be price gouging. The idea is that the government or charities can solve the problem and provide all the good people need so badly. Taking advantage of people’s need and making people pay so much is wrong.
The problem with this position, and the reason the name is so misleading, is that price gouging is often the fastest solution to any supply situation. It’s simple economics. When a disaster hits an area, people suddenly demand a lot more of the basic commodities. Whenever a sharp increase in demand occurs, businesses are forced to raise their prices, or else completely run out of their goods. While this seems at face value to be incredibly extortive and even evil, consider the market forces in effect.
In any market situation there are two interacting phenomenon that determine price: supply and demand. Consider the market for generators. In the wake of a disaster, many people desire generators to run their electronics, but few actually have one on hand. Now if producers are not allowed to increase their prices, whoever arrives first with the money gets the generator, even if that person only demands one to power his game station. However, increasing prices discourages buyers with less real need from consuming goods. That way, when people with higher demand – people that really need the good – arrive, there is still supply to find. For the father looking to power his fridge to preserve his daughter’s insulin, is it better to find a very expensive generator on the shelf, or no generator at all?
From the supply side, a higher price is a signal to producers. It signals a high demand, and thus a chance to make money. Producers will quickly jump on the opportunity to increase their profits, and the higher the price increase, the more producers will be attracted to the area. This is when competition enters the scene. When the first supplier of generators arrives, he can charge basically any price he wants – double, triple, even quadruple the normal price. But when another merchant comes in, the easiest way to sell generators is to charge a lower price than his competitors. To stay in business, the first supplier lowers his prices as well. Then a third producer brings more generators. Soon, the number of generators supplied will equal the number of generators demanded, and prices will return to their normal level. This only happens if prices are allowed to rise, and the higher they go, the faster they will fall. This means that even the people who cannot afford a high price benefit from a system that allows them because prices will fall much faster as supply rises to meet demand.
Thus the simplest solution, as heartless as it may seem, is to remove all laws against price gouging and let the market react as it will to the forces of supply and demand. High prices do more than just line sellers’ pockets. The send signals to the market that an area requires more of a commodity, signals that producers and profit seekers react to with incredible speed. The fact of the matter is, governments and charities simply can not act as efficiently or as quickly as the free market. Those organizations would still be under the same supply problems as the rest of the affected area, and without a proper profit incentive, outside producers would be very unwilling to bring their products. As noted by Tim Worstall at Forbes,* price changes equalize supply and demand faster than anything else. It is the solution disaster needs, but not the one anybody wants.
* Forbes killed this column after its publication for being too provocative.