The Dangers of Post-Disaster Price Caps
Hurricanes Harvey, Irma, Jose, and now Maria are striking one after another, battering the Caribbean and flooding the southern United States. In Florida alone, there were 5 million households left without power. The devastation left in the wake of the storms will take years to clean up. There are a few actions the government should not take, as they would inhibit the recovery process. One of these actions, is the implementation of price caps.
Price caps are a common occurrence after a natural disaster hits. After hurricane Sandy, New Jersey gas stations ran low on fuel very quickly. In order to turn a profit, the stores decided to jack up the prices. A higher demand of a good means a higher cost. However, the New Jersey government did not take kindly to the higher price, claiming that the gas stations had violated the state’s anti-price gouging laws. The laws set a price cap on all commodities by saying there cannot be more than a ten percent increase in cost of an item. New Jersey is one of only seven states that explicitly define what price gouging is. Of the 30 other states that have anti-price gouging laws, the statutes are intentionally vague. Maine’s law, for example, prohibits “unjust or unreasonable profit”. The 23 states that have laws containing ambiguous language do so because price gouging is subjective.
Since defining price gouging is subjective, it will be defined here as setting a price higher than the market price before a certain event, such as a natural disaster. From an unexamined moral standpoint, people who participate in price gouging are evil and price caps are meant to prevent the unjust exploitation of those in the greatest need. Price caps are implemented in order to satisfy demand while stopping exorbitant increases in price. In practice, this always fails.
Going back to New Jersey, the price of gas per gallon rose to twenty dollars a gallon. When New Jersey began enforcing the anti-price gouging laws, the price was capped at around six dollars. And did the price cap work? Well, according to reporter Peter Earl the price caps only managed to drive legal markets underground. They muddled the markets and distorted them, but did not end them. From the point of view of transactions, what was being purchased and sold, they made no difference. The gas stations began to run out of fuel because companies saw no point in increasing supply in an area where they would not turn a greater profit than any other week. The lack of supply drove people to purchase from the black market. Thus, price caps effectively turned people away from the legal purchase of goods, to the black market where the cost of gas rose even higher.
The disaster black market is not an entirely sinister one. While many of the people who take on the risk of heading into an unstable hurricane zone do so because they are driven by greed, these people are often the fastest at delivering supplies where they are most needed. The need drives up the price of goods, like gas, so small time capitalists tend to take advantage of the opportunity. Price gougers save lives by making available illegally the products that the market fails to produce.
The central argument against price gougers and for price caps is that the rich will be the only ones to be able to afford necessities. It is true that the wealthier will be able to afford what the poor cannot. However, a wealthy person only needs so much. Price gougers through market forces will be forced to lower their price, if only slightly, to make water available for those who can’t afford the original price. Again, the invisible hand of the market acts as a force for good.
Price caps are ineffective at best, and counter intuitive at worst. They create a market that forces people to illegally purchase goods just to survive. In times of crisis, price gougers do what the government fails to, and provides relief for those in trouble. The greed and self-interest that drives these people creates a symbiotic system wherein there is capital gain for the merchant as well as a material one for the consumer. The system could exist in perfectly legal market, were it not for the price caps so dearly loved by armchair economists. The caps are detrimental to the recovery of disaster areas. Without them, the government would be able to collect taxes from sales of basic goods like gas and water, allowing for more funds to be given towards disaster relief and prevention. If there is one thing the government should not do in the wake of the storms of September, its implement price caps.
Photo credit FEMA