A half mile away, just at the other side of my neighborhood really, many of the houses were under water. As Hurricane Harvey parked over my northern Houston suburb, officials at the San Jacinto River Authority released water from the Lake Conroe dam to keep it from spilling over. The water release added to the 17+ inches of rain that had already fallen on the West Fork of the San Jacinto River, and the river quickly spilled over into my neighbors’ homes.
Amazon's earliest arrival date was almost two weeks away.
It’s been six days since the rain stopped and I can personally confirm everything you’ve seen and heard about the recovery effort. The spontaneous coordination and cooperation have been nothing short of stunning. My neighbors have been ripping out sheetrock, tearing up tiles, squeegeeing floors, hauling furniture, cooking meals, and shuttling supplies. It’s been a thing of beauty.
There’s just one problem. We’re low on mops. And bleach. And gloves. And masks. Three days after the rain ended, my wife visited several stores and distribution sites, hoping to find cleaning supplies to shuttle back to the recovery crews in our neighborhood. No dice.
I went looking for them on Amazon, and the earliest arrival date was almost two weeks away. One of the local distribution points was saved by two trucks of supplies that were procured and delivered by ExxonMobil.
Why is it, when the need for these items is so great, when demand is so high, stores around the country aren’t rushing to ship their inventories to Houston?
When rules prohibit prices from reflecting changes in demand, they muddy the incentives.
The answer is institutions. When economists and political scientists refer to institutions, we are often talking about rules. We spend a great deal of time thinking about how rules shape our incentives. Sometimes, what we see is surprising.
In this case, the offending rule is section 17.46(b)(27) of the Texas Deceptive Trade Practices-Consumer Protection Act. The rule prohibits “selling or leasing fuel, food, medicine or another necessity at an exorbitant or excessive price” (emphasis added) during a declared disaster.
In the immediate aftermath of Harvey, Texas Governor Greg Abbott issued a proclamation noting that the law is designed to protect consumers who “are particularly vulnerable to economic exploitation during this challenging time.”
That all sounds well and good, until you start to think about the rule’s effects on incentives.
When rules explicitly prohibit prices from changing to reflect changes in the underlying demand, they muddy the incentives. To see this, consider what would happen without anti-gouging laws. Local demand for cleaning supplies would increase in the immediate aftermath of the flooding. As a result, the price would increase. Suppliers of cleaning supplies from around the country would have incentives to ship their goods to the Houston area to sell them at the higher price. Just as important, the prices would rise in other parts of the country too.
Anti-gouging law, designed to protect consumers, has the unintended effect of making them more vulnerable.
As Don Boudreaux pointed out in a recent entry at Café Hayek, consumers in other parts of the country would be incentivized to assist in this process. Imagine, a woman walks into a Walmart in Ohio looking for bleach. She sees the higher price and decides to buy just one bottle rather than the three she was intending to buy. Even if she knows nothing about the desperate need for cleaning supplies in Texas, she unintentionally assists in Walmart’s efforts, allowing greater supplies of bleach to be shipped to its Texas stores. The end result is that we could walk into any store and find cleaning supplies without issue.
Instead, the law prevents prices from rising excessively or exorbitantly (never mind the arbitrary nature of these terms). There are fewer incentives for stores to redirect their supplies. So, in the days after the flooding subsides, when people need bleach desperately to help stave off mold and other nastiness, it’s much harder to find than it should be. We are left to hope that ExxonMobil (and others) will appear miraculously with their trucks of supplies.
But think about what this means. People are made more vulnerable by the law than without it! Institutions are most pernicious – and most interesting – when they produce consequences that are completely opposite from those intended. In this case, an anti-gouging law designed to protect consumers in vulnerable situations has the unintended effect of making them more vulnerable.
Crises have a way of making visible the incentives and processes that are otherwise difficult to see.
Most folks don’t want to hear this. We tend to take institutions at face-value and assume that a law designed to protect consumers actually protects the consumers.
During the peak of the storm, several of my neighbors took to social media to vehemently condemn the local gas station because of the rumor – subsequently proved untrue – that cases of water were selling for $40. One Reddit thread encourages people to report “price gougers” and refers to those that raise their prices as “scumbags.” Despite all the goodwill built up in my neighborhood, this article isn’t going to win me an invitation to the next block party.
But this is what happens in crises and disasters. They often have a way of making visible the incentives and processes that are otherwise difficult to see. Anti-gouging rules are just one example.