Price gouging laws, shortages, and hurricanes

In the market economy the price of things is the signal that radiates throughout the society giving us valuable information. Any interference with the price mechanism by government is counter productive. As an example of governmental interference is the “price gouging” laws that most states have. The effect of these laws is to prevent firms such as gas stations from raising prices during times of scarcity so that those consumers who most urgently need gas can get gas while the rest of us who can do without tend to wait till the emergency is over because of the higher prices.

I live in Florida and so I am familiar with hurricanes and the clean up period after they pass by. A few years ago hurricanes Gustav and Ike caused severe gasoline shortages throughout the southeast but especially in Georgia and the Carolinas. The hurricanes disrupted the major pipelines feeding the southeast from the Gulf of Mexico and so less gas was available. For a short period as much as 60% of the normal gas supply was offline. For weeks after the hurricanes had passed the southeast was still facing rampant gasoline shortages.

The reason? Price gouging laws that prevented the market from doing what the market does best — ration items that have greater demand than supply.

So-called “price gouging” is just the market at work. When the supply of anything falls relative to demand then the price goes up and signals both consumer and producers to the new reality. The more the price goes up the more some people will choose to not buy and the more some suppliers will rush gas in from other areas to meet the need at the higher prices.

The northeast and Hurricane Sandy are just the latest examples of the “price-gouging” laws preventing the market from working and thereby making the situation worse. It is the higher prices that alert businesspeople to the shortage and to the opportunity to profit by rushing in supplies to meet the demand at the higher prices which would help to relieve the shortage.


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