Hurricane Katrina passed over New Orleans and the rest of the Gulf coast earlier today, and reports of “price gouging” are already coming in.
In Alabama, when the governor declares a state of emergency, it triggers a legal barrier to “unconscionable pricing.” That is (arbitrarily?) determined by the government to be a raise of 25% or more above the “normal” price.
Raising prices for scarce commodities during an emergency situation smacks of opportunism at best. So it seems on the face of it like an open and shut case in favor of state intervention.
But a greater understanding of how markets work and the price mechanism make the case somewhat more complex. An examination of the practical effects of price controls and limits shows the unintended consequences of such laws.
David M. Brown wrote a provocatively titled piece, “Price Gouging Saves Lives,” for Mises.org following Hurricane Charley in 2004. The thrust of the argument is essentially that to limit the prices vendors can charge is to reduce the incentive for vendors to go through the hardship and risk of transporting commodities to the afflicted areas.
If someone can sell gas for the “normal price” in both northern Louisiana and in New Orleans, why would that person take on the added expense of moving gas in to a disaster area? Brown writes:
If we expect customers to be able to get what they need in an emergency, when demand zooms vendors must be allowed and encouraged to increase their prices. Supplies are then more likely to be sustained, and the people who most urgently need a particular good will more likely be able to get it. That is especially important during an emergency. Price gouging saves lives.
Brown’s entire piece is worth reading. The ability to charge more for goods ensures that those goods will find their way into the “state of emergency.” Those interested in looking for a biblical precedent for situational pricing could look to Joseph’s actions during the famine in Genesis 41 (with the added caveats that biblical narrative does not equal imperative, that Joseph was technically acting in the interests of the government [i.e. Pharaoh], and that his actions fulfilled a specific purpose within God’s redemptive history. In other words, biblical precedent doesn’t necessarily create an ethical norm).