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Want to End Sandy Shortages? Let Gougers Gouge!

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The refrain is the same after every natural disaster: market conditions have changed dramatically, and evil, possibly sub-human "price gougers" are taking advantage of storm victims in their time of need. Politicians threaten those who raise prices after storms with vigorous prosecution. The general public howls with outrage. A lot of people think laws against "price gouging" are necessary to keep people from being exploited after natural disasters. Sadly, these people are wrong. I got to make these points on Thursday's episode of Stossel.

Laws against price gouging create shortages. In the aftermath of a disaster like Hurricane Sandy, people want a lot more gasoline, flashlights, bread, and water at any given price. For sellers, costs have risen. It may come as a surprise to some commentators, but gas station owners and other sellers of disaster relief supplies probably have their own shattered lives to attend to. A high price offers them an inducement to go into the market and provide disaster relief supplies instead of closing up shop. Higher prices are also like signal flares that attract entry from suppliers outside the affected market.

Higher prices also transmit valuable information to consumers who aren't affected by the disaster. Birmingham, Alabama (where I live) wasn't directly affected by the storm, but if prices were allowed to fluctuate freely, I would see gas prices in Birmingham rise. Why? Higher prices in New Jersey would attract gas supplies to New Jersey, and the higher price in Birmingham would tell me I need to consume gas more carefully than I normally would.

Laws against price gouging change how people pay, but they don't really change what people pay (here's an excellent explanation from Mike Munger). To say that price gouging laws "keep prices low" is misleading. Price gouging laws keep money prices low, but there are lots of other ways to pay for gas. Indeed, you've probably seen stories about people paying for gas through non-monetary means: they "pay" by waiting in line. Here's an example that's similar to Munger's: if the price of gas would be $14 per gallon after a disaster but is controlled at $4 per gallon by government fiat, someone who values his or her time at $10 per hour would be willing to wait in line for an hour to get a gallon of gas. What he or she pays doesn't really change. How he or she pays does change.

As textbook authors Tyler Cowen and Alex Tabarrok point out, this is pure social waste. When people can pay with money, both buyers and sellers benefit. When people pay by waiting in line, a very valuable resource--the time and energy of those who are waiting in hours-long lines--is simply wasted.

One of the most basic lessons in an introductory economics course is that price ceilings create shortages. Storms can break windows, but they can't break economic laws. Politicians ignore this not to their peril but to ours. Political leaders see themselves as the compassionate friends of helpless storm victims, but the victims are positively harmed by policies like laws against price gouging that create shortages and delay recovery. People suffer during and after natural disasters, and politicians' meddling only makes it worse. With friends like that, who needs enemies?

Inspired by this entry by fellow Forbes contributor Panos Mourdoukatas.