During an emergency like a hurricane, many different categories of goods and services experience supply-demand shocks. The shock may be because of a fall in supply (e.g. oil companies can’t get gasoline into the area) or a spike in demand (e.g. for generators or plywood) or a combination of both. In a free market, prices will rise to help match supply and demand. Higher prices cause people with less valuable or more frivolous uses of the scarce goods to defer purchase, and can cause suppliers to expend extra effort to get product into the area, even diverting supplies from other areas.
When the government institutes price gouging laws in an emergency, the supply-demand mismatch that leads to the rising prices isn’t magically eliminated. First, without higher price incentives, all the incentives to get more supply into the area are lost. Supply and demand under these regulations can only be matched by rationing demand, and typically this is through queuing and increasing search costs (e.g. driving around all over the place looking for a station that is open and has gas). People who gain the limited supplies in this regime are thus those with a lot of time on their hands, where the marginal cost of queuing and driving around does not impose a lot of cost. Think about a roofer scrambling to repair roofs after the a storm — do they have time to have their trucks and crews sitting dormant in gas lines? Thus, price gouging laws tend to ensure that scarce goods in an emergency flow to those with the least use for them.
Warren Meyer, “Price Gouging Laws: Allocating Goods in An Emergency To People Who Have Nothing Much Valuable to Do”, Coyote Blog, 2017-08-26.
September 26, 2019
QotD: Preventing “price gouging” is counter-productive in an emergency
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