As Hurricane Florence hit the Carolinas, hundreds of thousands of people evacuated the coastline. The storm uprooted both trees and families as a scramble for plane tickets, gasoline, and necessities ensued.
Meanwhile, my friends and I at Duke University prepared to spend hours confined to the comforts of our dorm rooms, our electricity—and our Wi-Fi—supplied by a world-class electric grid powering one of the premiere medical centers in the country.
Nevertheless, class was cancelled, and we instead attended virtual lectures and online discussion sessions during our time off. The hurricane gave us apt material to discuss. In our ethics classes: “Should airline companies really be charging exorbitant prices for people who need to evacuate?” In our economics classes: “By what percentage are businesses increasing their profits due to a natural disaster?” In our anthropology seminars: “Doesn’t raising prices for scarce necessities cause systematic disparities between the poor and the rich?”
Opponents of price gouging (raising prices drastically during natural disasters) primarily criticize both the “unfair” profiteering of greedy corporatists and the social Darwinism it promotes. As resources become scarce during natural disasters, only the “fittest” who can afford to bid up prices are rewarded. When it comes to necessities, the meritocracy we live in results in inequality.
In reality, North Carolina has banned price gouging, a legislative decision with grave economic consequences.
When natural disasters hit, demand for necessities and supplies skyrocket, pushing prices upward. The increased prices force people to self-ration scarce goods. The price informs us both how much of the supply is available and how many other people need it. With anti-gouging laws in place, however, the price signals fail to communicate essential information.
The Ice Arbitrageurs of Raleigh
Duke Professor Mike Munger explains it best in an EconTalk podcast where he recalls September of 1996, when Hurricane Fran hit Raleigh, North Carolina. As the storm brought down trees and power lines across the city, few people had backup generators with enough fuel to run, but far too many people needed ice to keep their refrigerators cool.
Many people wanted ice, but the people who really needed it had infant formula or insulin to keep cold. In response, a few young men in Goldsboro, a city about 60 miles away from Raleigh, saw a profit, rented a few refrigerator trucks, filled them with ice, and drove to the center of Raleigh, setting up a business selling ice bags for $12 a bag.
A long line formed; people who desperately needed ice for their insulin purchased a few bags, whereas those who merely wanted to keep their beer cool decided it wasn’t worth it. Because the beer-drinkers decided not to buy, there was ice left for those at the back of the line who needed it.
Unbeknownst to these arbitrageurs, however, North Carolina’s anti-gouging laws prevent people from selling goods at “unreasonably excessive” prices in response to natural disasters. The police arrived and shut down the operation, seizing the ice so it was no longer available to buy.
The problem with anti-Darwinism
While Duke students philosophize about the injustice of a social Darwinist approach, they miss an important fact: interfering with the price system interferes with the efficient allocation of resources. As Dr. Munger explains, it’s a paradox: Higher prices are the only way of bringing lower prices. Price gouging, while unfair at first, ultimately brings about more resources and eliminates the scarcity, rendering this anti-Darwinist sentiment unfounded.
The arbitrageurs in the ice-selling scenario were the first to respond (illegally) to an excess demand for ice. However, if anti-gouging laws were lifted—allowing others to do the same—increased competition would drive down prices over time. As additional impromptu businesses entered the market, they would continue to mark down their ice to sustain business until the prices converged with the costs. Once prices fell that low, information would be conveyed to consumers: lower prices mean larger rations.
In the few hours when ice was necessary to keep insulin cold, what other system of rationing scarce goods would ensure resources were properly allocated? Students of economics can take a lesson from Hayek: If we abandon the price mechanism, we face the calculation problem. Prices can not only ration resources beyond the foresight of a central planner—they can also increase supply.
Moreover, why are we so quick to criticize social Darwinism only when it manifests as rich people taking all the ice? With anti-gouging laws, there is no incentive for the limited supply of ice to grow, and low prices are only available for the first to the scene. Without price signals reflecting the scarcity of necessities, the first to the marketplace are free to take more than they need.
The irony is that this system of anti-gouging is even more Darwinist than the first. Aren’t the first to arrive at the store the very same people who have their own cars, who get weather alerts on their Apple Watches, who are able to leave work early because of their flexible schedule? What is stopping them from saving supplies for those who only hear of the hurricane by word of mouth and take slow public transportation to the stores? Not only are the first to arrive often the very same people who threaten to deplete the supply under higher prices—they also never feel the pressures of limited resources telling them to save some for the next person.
This pricing system of free markets has survived because it properly apportions resources in a world of scarcity, yet the university bubble shields us students from this fact. Students, among the first to criticize the “greedy profiteers,” feel no pressure from the consequences of anti-gouging laws. As part of a generously endowed university, the administration and employees were among the first to stock up on additional supplies. My peers and I could walk into a fully stocked lobby shop and have our selection of snacks just hours before the storm.
Outside of our bubble, however, shelves were empty and gas pumps were dry. Because North Carolina has instituted anti-gouging laws for the simple aim of protecting consumers, we have chosen to restrain the powers of prices and unleash the damages of storms.