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).


  • http://hurricane.blogcarnival.com/archives/2005/08/the_ethics_of_p.html Hurricane!

    Prices for home repairs and vital necessities will fluctuate during Hurricane Katrina recovery….

  • john

    Laws against so-called price gouging are simply another form of price controls, which invariably, without exception, lead to reduced availability of an already scarce commodity.

    While there can some element of charity in bringing scarce commodities to a disaster area, this cannot replace, even for a short time, the pricing mechanism as the quickest, most effective, and morally proper allocation of resources.

    A simple case in point: A northern Mississippi motel decides to double its room prices in the face of hundreds of families seeking shelter. Given that, it’s likely that certain families would elect to double up, thereby providing shelter for more people. Maintaining the old “normal” price would mean that fewer people would find shelter of any kind, since there would be no incentive to share.

  • http://subintsoc.net Maximus

    Here are some biblical imperatives for you:

    Jesus said to him, “If you want to be perfect, go, sell what you have, and give to the poor, and you will have treasure in heaven; and come, follow me.” But when the young man heard the saying, he went away sad, for he was one who had great possessions. Jesus said to his disciples, “Most certainly I say to you, a rich man will enter into the Kingdom of Heaven with difficulty. Again I tell you, it is easier for a camel to go through a needle’s eye, than for a rich man to enter into the Kingdom of God.” –Matthew chapter 19

    He also said to the one who had invited him, “When you make a dinner or a supper, don’t call your friends, nor your brothers, nor your kinsmen, nor rich neighbors, or perhaps they might also return the favor, and pay you back. But when you make a feast, ask the poor, the maimed, the lame, or the blind; and you will be blessed, *because they don’t have the resources to repay you.* For you will be repaid in the resurrection of the righteous.” –Luke chapter 14

    But when the Son of Man comes in his glory, and all the holy angels with him, then he will sit on the throne of his glory. Before him all the nations will be gathered, and he will separate them one from another, as a shepherd separates the sheep from the goats. He will set the sheep on his right hand, but the goats on the left. Then the King will tell those on his right hand, ‘Come, blessed of my Father, inherit the Kingdom prepared for you from the foundation of the world; *for I was hungry, and you gave me food to eat; I was thirsty, and you gave me drink; I was a stranger, and you took me in; naked, and you clothed me; I was sick, and you visited me; I was in prison, and you came to me.*’
    “Then the righteous will answer him, saying, ‘Lord, when did we see you hungry, and feed you; or thirsty, and give you a drink? When did we see you as a stranger, and take you in; or naked, and clothe you? When did we see you sick, or in prison, and come to you?’
    “The King will answer them, ‘Most certainly I tell you, inasmuch as you did it to one of the least of these my brothers, you did it to me.’
    –Matthew chapter 25

  • http://www.schlacks.org John Powers

    Hmm..Maximus,

    Yes, Jesus gives us the imperative to provide for the poor. Isn’t the best way to provide for the poor to set up a smooth running distribution system that makes the necessary goods most available to those in need.

    So, by running a gas station that has the most gas at the best price for the most people, wouldn’t that be the lesson that Jesus is telling us?

    The market has provided more for the poor on any given day than charity has in accumulated history. Can we let it work?

    JBP

  • Ben Houston

    I cannot believe what you people are actually arguing that price gouging is fine. It’s simply wrong, and to try to justify it using faulty economic analysis is assinine. First of all, this libertarian notion that markets without any regulations whatsoever always work better than regulated markets is flawed. Yes, if the demand for goods is elastic, and there is perfect market competition, then no regulation is probably to everyone’s benefit. However, when the demand for goods are inelastic and market imperfections like external costs, monopolies, oligopolies, ect. exist, the assumption that no regulation of the economy works to everyone’s benefit is flat out wrong. History bares this fact out. As result of laizzez faire economics, we suffered through the Great Depression. Keynesian economics, whicch recognizes the need for some regulation, has helped us to avoid another great depression. Furthermore, it is simply immoral to take advantage of people in such desparate need. We should all be making donations and doing what we can to help because but for the grace of God, we could be in these people’s shoes. As a great nation, we have a moral obligation to put our collective resources to use to help these people through this horrible disaster. Finally, your assumption that fewer people will provide help to these people in desperate need if they cannot take advantage of them is also misguided. As demonstrated after 9/11, Americans will do what is necessary to help out its fellow citizens when they are in such desperate need because most Americans do feel that it is their moral obligation to do so. Those who are so craven and immoral as to take advantage of their fellow human beings in such desperate need should be scorned and prosecuted to the full extent of the law. As the bible says, their is a season for everything under the sun, including making profits, but in a time like this profits must take a back seat to helping out those in desperate need of assistance.

  • http://www.schlacks.org John Powers

    If I were in the shoes of a refugee of the storm, I would certainly hope that there would be stores open and ready to do business.

    The misguided condemnation of those that work to provide the basic necessities for our suffering brothers, does not do a thing to bring relief.

    How about

    1) Encouraging donated goods, services and dollars.
    2) Encouraging stores to get open and sell the products needed to survive.

    rather than pointing fingers.

    JBP

  • Dean Blobaum

    “The market has provided more for the poor on any given day than charity has in accumulated history. Can we let it work?”

    Do you have a citation for this statistic?

  • http://www.schlacks.org John Powers

    Hi Dean,

    Pretty much a rhetorical statement. Hard to justify.

    I revert to,

    “The vast majority of providing for the poor comes through the market, rather than charity. Can we let it work?”

    JBP

  • DRJ

    Sure, let ‘em gouge away, but institute a surplus profits tax, as was done during and right after WWII. That way, society will capture the gains that result from natural catastrophes. These can then be used to rebuild and replenish the social loses that result from that catastrophe. Or, to avoid the excess profits taxes, business can invest and create greater long run supply which will return prices to lower, competitive levels.

  • http://www.schlacks.org John Powers

    Ok,

    But isn’t business taxed to the choking point already? For the life of me, I cannot see how societies gain much benefit from the government collecting money.

    Wouldn’t business form the systems necessary to provide for catastrophe, if they know that are not subject to government confiscation of the gains they make from preparation and hard work?

    JBP

  • David M. Brown

    I agree that Brown’s entire piece is worth reading. Those arguing that we’re all better off if businesses who provide needed goods and services are crippled and hamstrung need a better understanding of markets as well as morality. Massive government intervention in markets, not unhampered markets, brought on the Great Depression and our current housing and credit mess. See, for example, Murray Rothbard’s book on the great depression, and Jim Powell’s more recent overview of relevant issues pertaining to it.

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