In light of the devastation caused by hurricane Ida in the Gulf of Mexico and up the US East coast, I think now is a good time to discuss a government policy that impedes disaster relief. Most states have laws on the books to prevent price gouging. Typically, the laws target charging prices in gross excess (or at unconscionable levels) for necessary goods immediately following a disaster or declared state of emergency within the area. Some states tie the price level to an average of the last 30 days or 10% above the prevailing market price leading up to the event; however, most of the laws opt to use more vague language to allow for nuance in different situations. Violations can be punished by anything from a small fine to a few years in jail! Unfortunately for individuals in disaster area, price gouging laws make their situation worse.

Now, no state legislator intentionally drafted legislation designed to kick people while they are down. I assume that each price gouging law was written and passed with the best intentions. It sounds like a great practice! Who wants the greedy business owner profiting off of the suffering of people who have lost property, suffered injury, lost loved ones, or have even been trapped by a natural disaster!? Sadly, these laws come with the unintended consequences of infinite prices. As a recent class assignment, I was instructed to respond to the last 20 minutes of this podcast where two individuals discuss price gouging. One of the individuals, my professor, suggested that these laws lead to far worse price gouging by creating essentially infinite prices. Because goods cannot be sold at a higher price than usual in unusual circumstances, shelves will not be restocked forcing everyone in the immediate area to contend with a shortage until the crisis ends. Basically, by holding prices low, states allow prices to jump to infinity (for the consumer) once the last gallon of gas is pumped out of the station. No one can purchase the goods, so the price may as well be infinity. Of course, this is not truly the case; however, the idea drew my attention to the true affects of price gouging.

How does this work? If Joe Shmoe could sell generators at his hardware store for $650 before the disaster and still make a profit, why can’t he do this at a sustainable level afterward? Well, demand has skyrocketed meaning that consumers are willing to pay a higher price for his generators because they want it far more than they used to. Mr. Shmoe can raise his prices by maybe 5% without catching the attention of the authorities, but demand has surged 1000%, so he cannot keep product on his shelves. The state has prevented price from communicating the value of a good in a community, so the supply will not match demand. Our store owner cannot afford to order more generators or pay for faster shipping, use more expensive vendors, or even buy from retailers out of state, because he cannot charge a price commensurate with the increasing demand. Instead, he has to trod on as if nothing has happened. In a state without such price controls, Mr. Shmoe could begin charging higher prices for his generators. Seeing an opportunity for profit, entrepreneurs from other areas will begin moving generators to town for sale. Sure, it costs them more to truck them all the way to the disaster area, but the higher prices compensate them for their work. The higher the price, the larger the group of individuals and firms will be attracted to the area. Eventually, this activity will drive prices down by boosting supply to match the heightened demand. After a while, individuals will have the generators they need, or the power will be restored in their neighborhood, and demand will begin to fall. This will drive prices down even further. As prices begin to fall, participants begin to leave the market until “normalcy” is restored. By the time the crisis is over, prices on generators will likely return to normal (as defined by the market), and those in need will have the supplies they need when they need them. The issue is, all necessities are affected by these rules. Sure you can imagine making do without power, but what are you to do if local vendors cannot keep baby formula on the shelf? Policies against price gouging have real, life altering consequences.

I completely understand the desire to protect those stuck in a bad situation, so I do not blame state governments for trying to help. Good intentions aside, these laws only make things worse. Yeah, it sucks to have to pay 3,4, or 5 times the price from before the disaster to power your home, fuel your car, or feed your family, but it sure beats going with out. Because we live in a broken world, we cannot avoid disasters. Price gouging laws ask vendors to act as if the disaster does not exist, and in the end, the vendor and all those who would have purchased goods from them at “grossly inflated” prices suffer for it. We need to take the world as it is, and the world has disasters. Luckily, markets are able to correct for disruptions by changing prices.* Overtime, supply chains can shift to respond to heightened demand, and some semblance of normalcy can return. This does not excuse the rest of us from seeking to help those in desperate need; however, it does not help those affected to stop them from helping themselves. We should not ignore the resources on the ground, or, even worse, prevent people from using what they have to help pull themselves out of the mess.

*While writing this article, I spoke to my parents who have a lot of experience in the swimming pool industry. Over the last couple of years, there has been a huge surge in demand for backyard recreation. Pool companies have been allowed to increase prices, and they certainly have, but it is still hard to keep product on the shelf at times. Now, many who bought large quantities of affected goods, like chlorine, ahead of the spike are beginning to sell some of their supplies to neighbors and friends. This has forced local store owners to reduce prices because of this type of entrepreneurship. Obviously, this is not a one for one equivalence, but it shows that prices adjust to compensate for demand shifts, and if demand jumps enough, new players will enter the market and drive prices down.