A tornado ravaged Oklahoma last week, destroying hundreds of homes, killing dozens, and injuring hundreds more. Unfortunately, it looks like the citizens of Oklahoma are about to be ravaged by another storm brought on by the Oklahoma Attorney General, Scott Pruitt.
According to ABC News, Pruitt and his staff began “aggressively combing the region for fraud just hours after the tornado . . . and immediately [found] businesses violating the law.”
What laws were the businesses accused of violating? Anti-price-gouging laws. Using powers granted by the Emergency Price Stabilization Act, Pruitt is hoping to help the people of Oklahoma by preventing businesses from profiting off of the suffering of the townspeople, many of whom just lost their homes. He goes so far as to say, “[the townspeople] never anticipate or expect that someone would take advantage of them right now, but this situation is what criminals prey upon.”
While Pruitt no doubt intends to help the local citizens, his misunderstanding of the workings of the price mechanism will lead only to folly and the prolonged suffering of the very people that he is trying to help. What he is effectively arguing for is a price ceiling on basic commodities, such as water (which is reportedly being sold for $40 per case today as opposed to only $3–$4 just a few weeks ago).
Any price ceiling has very predictable results: a shortage.
When prices are held below their market value, the effect is that there will be a large number of people who are willing to purchase water at that price but very few sellers willing to sell the water at that price. This means that people will compete on non-price margins to acquire water; that is, they will queue, sometimes for hours on end. The time that they spend waiting in line, however, is a deadweight cost as it is value that is forgone but is not captured by anyone. So now, instead of contributing toward the reconstruction of the town, the people are stuck waiting in line for water.
The beauty of the price mechanism is what it accomplishes in situations like this, assuming, of course, that officials allow it to function properly. In this situation, demand in Oklahoma rises and producers, seeing an opportunity to profit, reroute trucks and planes to Oklahoma, thus increasing the quantity of water supplied in the area that needs it most.
Absent the rise in price, we would have to rely on the benevolence of these companies to help the people in need (and assume that they knew what the people of Oklahoma wanted to begin with).
This isn’t in and of itself terrible. Obviously companies do send extra water to places that experience disasters, and the Red Cross does send volunteers and other resources. But notice that nothing in the preceding analysis precludes this benevolence. Why rely merely on benevolence when we can also rely on self-interest? If the goal is to help people get clean drinking water, it stands to reason that we ought to incentivize producers in as many ways as possible, be they other-regarding, self-regarding, or both.