Don’t Outlaw Price Gouging After Harvey. Let the Market Work

This article first appeared on the American Enterprise Institute site.

Form-500x547 AEI

Using the blank “Fill-In-The-Blank Price Gouging Form” above that I learned about from Art Carden almost ten years ago, I’ve started filling in the form below for Hurricane Harvey based on news reports that the attorneys general in both Texas and Louisiana have pledged to prosecute businesses who engage in “illegal price gouging” charging market prices for goods that are in high demand and short supply.

Fearing increases in the prices of ________________ (name of items in short supply) as a result of a HURRICANE HARVEY (type or name of disaster), officials in TEXAS and LOUISIANA (affected state or municipality) have declared a state of emergency whereby restrictions on “price gouging” are now in effect. According to LOUISIANA ATTORNEY GENERAL JEFF LANDRY and TEXAS ATTORNEY KEN PAXTON (names of politicians, attorneys general or law enforcement officials), the law is designed to protect innocent consumers from “unconscionable” increases in the prices of ______________ (names of specific items in short supply, e.g., water, food, gasoline, ice, electric generators, chainsaws, plywood, etc.).

Warning: The unintended and unseen adverse consequences of enforcing price gouging laws are predictable, unfortunate, and avoidable.

While price ceilings may be motivated by an understandable desire to help consumers in Texas and Louisiana by keeping prices low, those artificially low prices exert secondary effects that are guaranteed to retard the recovery process following Hurricane Harvey.

As the prices that are kept artificially low by government mandate, consumer demand for critical supplies (fuel, food, water, generators, plywood, hotel rooms etc.) will quickly outstrip the available supplies resulting in artificial shortages for those supplies.

The price gouging laws that prevent prices from rising to reflect the true market conditions are also guaranteed to slow the flow of critical goods and supplies into the affected areas in Texas and Louisiana.

Shipments that do arrive in those affected areas will likely be greeted by long lines of consumers, many of whom may end up without anything.

What we know with economic certainty is that the price gouging laws in Texas and Louisiana are guaranteed to result in serious misallocations of critical resources at the exact time that an efficient allocation of those scarce, critical resources will be desperately needed.

Bottom Line: A frequent claim we hear is that the laws of economics should be suspended, ignored or circumvented following a natural disaster like Hurricane Harvey, which then motivates laws against “price-gouging.”

But you can make a stronger case that it’s during the period following a natural disaster like a hurricane when we want market prices to prevail and market forces to operate as forcefully and powerfully as possible.

Reason? It’s the period immediately following a disaster like Hurricane Harvey when efficient resource allocation and addressing scarcity become more heightened than during a normal, non-disaster period.

GettyImages-839977904 Naomi Coto carries her dog Simba on her shoulders as they evacuate their home after the area was inundated with flooding from Hurricane Harvey on August 27, 2017 in Houston, Texas. Joe Raedle/Getty

Disasters typically create huge economic disruptions that usually make certain critical goods much scarcer (water, plywood, fuel, ice, generators, chainsaws, hotel rooms, etc.) than before.

To address those serious economic disruptions and disaster-related shortages, we only have two basic choices: a) market prices that accurately reflect true scarcity and market fundamentals, or b) price controls that ignore scarcity and market forces, and therefore transmit false information about scarcity.

As cruel as it may sound to those who are long on indignation and short on economics, market forces and market prices will address the post-disaster shortages in Texas and Louisiana more quickly and more effectively than government-determined, non-market based prices that result from price gouging laws.

Mark J. Perry is a scholar at AEI and a professor of economics and finance at the University of Michigan's Flint campus.