By Chad Thomas
Prices can tell us a lot. They communicate information about the value of resources in an economy and coordinate action among myriad buyers and sellers, many of whom have never met. The price system often comes into question in the aftermath of a natural disaster like Hurricanes Hermine and Matthew, as when companies raise prices in response to spikes in demand for scarce resources. However, this business practice, commonly referred to as “price gouging,” may actually aid in disaster recovery.
After a natural disaster, the availability and demand for goods and services abruptly changes. Roads may be blocked and electricity may be unavailable. Batteries, flashlights, water, food, gasoline and other necessities become more valuable before, during, and after a storm. Many Tallahassee residents recently experienced this first hand with Hurricane Hermine. Businesses are incentivized to increase prices under such circumstances. Inflated prices can signal what and where goods and services are needed most and encourage businesses, both within and outside the affected community, to move increased numbers of these goods into the area. No one likes to pay more for necessities after a storm, but allowing prices to fluctuate in response to demand and supply can aid in disaster recovery.
From the perspective of consumers, price increases during natural disasters can feel exploitative – and public officials apparently share this sentiment. Some states including Florida, Louisiana, New York, and New Jersey have laws against price gouging that go into effect after a hurricane strikes. These laws set a price ceiling for certain products. New Jersey “considers price increases of more than 10 percent during a declared state of emergency to be excessive” and may impose fines on companies that implement them. During Hurricane Hermine, Florida’s Attorney General Pam Bondi set up a price-gouging hotline that residents can call if they feel they have been unfairly “gouged”.
The question of fairness is an important one, but anti-price gouging laws aren’t necessarily more fair. Price gouging laws prevent information about scarce goods from reaching suppliers, slowing recovery for all. Setting a price ceiling can cause shortages, leaving many people without necessities. If prices are allowed to rise in response to such an increase in demand, sellers are likely to move goods to the disaster zone where they are most needed and profitable. Under either situation, there won’t be enough for everyone.
Perhaps not surprisingly, most economists oppose laws that prohibit price gouging. For instance, in a 2012 poll of 40 economists at leading research universities in the US, a majority expressed disagreement with a proposed price gouging bill in Connecticut. Agreement is not unanimous, however. Nobel prize winning economist Angus Deaton, strongly agreed with the proposed anti-price gouging law.
In the aftermath of a catastrophe, government officials do not immediately have all of the necessary information to help communities recover. Coordinating a recovery effort is inherently complex and difficult to plan for. When Hurricane Hermine hit Tallahassee three weeks ago, public officials had to determine how many utility workers would be needed to remove fallen trees from roads and repair downed power lines. Some residents were without power in Tallahassee until a week after Hermine made landfall. Even in the aftermath of a major natural disaster, the price system (if allowed to function) can quickly send important signals to suppliers and consumers about what and where goods and services are needed most.
As Hurricane Matthew makes landfall, Florida’s price-gouging laws will only slow the return to normalcy. Gas stations in South Florida expect shortages, and such shortages are unavoidable without allowing prices to rise. It’s estimated that nearly 1.4 million residential properties with a reconstruction value of $287 billion are at risk of damage. Reconstructing damaged property will take time, but would be aided by prices that reflect demand.
Natural disasters are not easy to recoup from, but prices can help spread information about necessary supplies to aid in recovery.