Donald J. Boudreaux: On Price Gouging — Is It Fair to Raise Prices after a Natural Disaster?

The immediate aftermath of a natural disaster inevitably brings much higher prices for staple goods, such as lumber, batteries, fuel, and bottled water. Just as inevitably, these higher prices are roundly decried as unjust and inexcusable.

Hurricane Jeanne

Hurricane (Photo credit: kakela)

Donald Boudreaux lives in New Orleans and experienced Hurricane Katrina (September 2005) and its aftermath. Part of the aftermath was uninformed people—some economists who should have known better—decrying the rise in the prices of staples, calling merchants offering them at the higher prices “gougers”—seeking only to take advantage of the situation.

In fact, as Boudreaux points out, they were simply responding to market forces: supply and demand:

Prices are not set arbitrarily. They are what they are for a variety of reasons. These reasons are summarized by the two words “supply” and “demand.” Prices reflect existing conditions of supply and demand.

If the price of bottled water rises, it does so either because supplies have fallen or because people’s demand has risen. In the wake of natural disasters, both of these effects kick in strongly.

He teaches us several things. First, there is the of the market. It will not be denied. It may be, and will be if Isaac results in the same thing happening, that prices of, say, bottled water, rises substantially. That is the reality. We need to face it:

The higher price per bottle reflects the underlying reality; it reflects the that bottled-water supply is lower and bottled-water demand is higher. In short, it reflects the fact that bottled water is now more valuable than it was before the disaster…

And how best to deal with this unfortunate reality? To begin, never pretend that is other than what it is. Face reality squarely, fully, and soberly.

Second, the market price for bottled water gives out information to consumers and producers. It’s vital information that they need in order to make sensible decisions:

If the market value of a bottle of water is $25, preventing merchants from charging a price higher than $5 shields consumers from the that potable water is now more precious than it was pre-disaster. The price cap also shields suppliers from this same truth.

The inevitable consequences of this hoax only add to the problems caused by the natural disaster. With the price artificially kept low—at its pre-disaster level—consumers will try to use this now-more-precious commodity today with no more care than they used it yesterday.

Lesson: when government intervenes in the market, it distorts the market which results in poor decisions being made by those participating in the market. In a nutshell that’s what government interventions always do.

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