In anticipation of Hurricane Matthew, a category 4 hurricane, 1.5 million Floridians have been ordered by Governor Rick Scott to “Run for [their] lives.” The government has declared a state of emergency and 10 Florida counties have been evacuated. Experts are predicting infrastructure shocks, including loss of electricity for up to a week and extensive damage to roads and bridges.
The same applies in Georgia and South Carolina. All these states have such legislation in place – and it becomes destructive of economic forces at exactly the worst time.
As millions prepare to flee for their lives or fight for their homes, consumers are clearing the shelves, to the point that they are stripped bare. The demand for essential goods and home preparedness materials has skyrocketed, yet the prices for these goods remain fixed due to anti-price gouging legislation.
The Attorney General’s office is South Carolina is already fielding complaints of gouging. There are few, and sometimes even no, hotel rooms remaining, which is to be expected given that hotels are forbidden from raising rates to keep up with demand. So instead of people cooperating to put four people in a room, for example, all the rooms are full with only one or two residents. During an emergency!
What are the consequences of this imbalance? Widespread shortages.
What are the consequences of this imbalance? Starvation, dehydration, property damage, medical damage.What will shortages mean for victims of the the hurricane? For the most vulnerable, they could mean starvation, dehydration, extensive property damage, or the inability to preserve medical goods such as insulin and donated blood. Damage to infrastructure could prevent shelves from being restocked. The inability to raise prices to compensate for additional shipping costs will limit the willingness of businesses to brave these conditions, in order to provide relief for those in need. While many companies will do so regardless, for love of their countrymen, not all will be so inclined.
In addition, such legislation prevents the emergence of profit opportunities for new suppliers to enter the market. If there is no such opportunity, new suppliers will stay home and citizens will not have access to essential goods and services.
The intent of anti-price gouging legislation might be honorable. To the untrained eye, raising prices in areas in danger seems a moral hazard. Why are businesses ripping people off just when they are most in need? However, once one accounts for supply and demand, one may be able to see that price gouging could save lives. Indeed, it is the legislation that prevents supply and demand from working that ends up ripping people off.
When the price of a product, such as a generator, rises, there are fewer buyers. This reserves stores of these generators for those who need them most. The higher price would discourage those seeking the generator for frivolities – to update their Facebook statuses with pictures of their hurricane parties, perhaps.
The only people willing to pay a higher price would be those who truly need the generator – perhaps the mother of a diabetic child, who will die if his insulin is not refrigerated. Or a store owner, who needs the generator to preserve goods to feed his neighbors. High prices incentivize conservation of resources for those most in need, and incentivize more people to transport goods to affected areas for sale.
Hurricane Matthew has not yet made land in the US, and has already claimed 11 lives in the Caribbean. How many lives will be claimed due to the inability of those affected to meet their needs, thanks to ill-conceived laws?