After writing an article in favor of price gouging during hurricanes, Forbes writer Tim Worstall was deluged with naysayers. Among his alleged crimes were not caring for the poor and even wanting babies to die.
But the evidence is clear: Tim Worstall is right, and, if anything, laws against price gouging will cause more babies to die.
There are two main issues to consider. First, the issue of equity– do anti-price gouging laws promote fairness? The second issue is supply– do high prices encourage sellers to provide more supplies during natural disasters?
Anti-price gouging fanatics almost always focus on fairness, and assume that low prices will necessarily lead to more of it. But that assumption makes no sense at all, because the low-price rationing system is comically inequitable. Should a man be able to buy the last case of water bottles while the women and children behind him get nothing, just because he happened to get to the store 30 seconds earlier?
Anti-gougers obsess over wealthy people buying all the water, but what if the first person who gets to the store is a rich person? What’s to stop this person from buying 5 times as much water if the price is 1/5 of what it would have been if prices were allowed to increase?
And what is with the anti-gouger idolization of first-come, first-served rationing? Is there any reason at all to expect the people first in line to be the people most in need? A rationing system based on high-stakes races to the grocery store sounds more like a Hunger Games novel than a civilized response to hurricanes.
There’s just no reason to expect the outcome of high prices to be drastically less fair than the first-come, first-served alternative. It can’t be, because the status quo of low prices, lines, and shortages is already so terrible that we can’t do much worse.
To add to the equity problems of first-come, first-served rationing, research from W. David Montgomery, Robert A. Baron, and Mary K. Weisskopf finds that the savings from lower prices are offset by the costs of waiting in line (at least for gas). That huge amount of time wasted could instead be spent on, say, assisting with relief or rescue efforts.
What about the supply issue? Advocates of higher prices claim the money will motivate sellers to supply more, while the low price crowd retorts that hurricanes will prevent more supplies from getting in, regardless of price. Unfortunately I can’t decide this issue with data because I haven’t seen any studies examining the response of suppliers to high prices during hurricanes. But a few years ago liberal nerd Matt Yglesias pointed out that, even if the low price crowd is right, we can still expect higher prices to lead to more goods, because sellers will have an extraordinary incentive to stock up the products before the storm. Without the high prices, sellers have much less incentive to stock up on the relevant goods. Even with the most pessimistic assumptions, higher prices increase the amount of hurricane-related goods available.
We therefore end up with the following scorecard: on equity, a tie between both options; on supply, high prices win. It’s safe to say higher prices would improve outcomes.
But that still leaves us with the frustrating outcome on equity. Thankfully we don’t have to decide only between first-come, first-served rationing and rationing via high prices. With some creative thinking, there are all sorts of policies that could be devised to address the two problems of equity and supply. For example, we could try to improve the equity of the high-price policy by subsidizing hurricane goods to ensure that they remain affordable. Or, if a perfectly equitable outcome is desired, the government could buy water and ration it out per person. Somehow we’ve settled on the worst of all possible policies, getting neither fairness nor adequate supplies.
To adapt to climate change, we must implement better public policies to deal with intense weather. As more and more devastating storms hit the coasts, it becomes more important for economists and policy nerds to advocate against price gouging laws and for the many better alternatives.