When a disaster strikes – be it a hurricane, a pandemic or even armed conflict, an instinctual economic reaction is to hoard items. This arises due to a loss of trust in the ability of the market to reliably supply items that are needed, should events continue to escalate. Goods such as food, water and basic health items are often the first to disappear from shelves when a crisis is anticipated.
Because disasters often come with relatively little short notice, sellers are rarely able to stock up sufficient quantities, and producers are also unlikely to be able to meet demand, at least in the short term. Oddball items such as sandbags, shovels, or flashlights are typically difficult to maintain a steady supply of, but become crucial in a crisis. With such a drastic increase in the number of goods demanded, the basic laws of supply and demand dictate that, as the supply remains constant while demand rises, the only variable left is prices.
Here lies our conundrum. The market appears to be working as intended, but asking people to pay exorbitant prices for items that are necessary to survival (such as water or sanitary items) seems contrary to unwritten rules of how to act in a crisis. Indeed, laws preventing price gouging are in place and are often re-emphasised during a crisis.[i] Despite blatant violations, such as the photo above, law enforcement and consumer protection agencies are generally able to remedy cases of overcharging.
But this brings us into a wider debate over increasing prices during crises – should price gouging be allowed?
There are clear economic arguments for why “price gouging” should be allowed. For one, it incentivises sellers to continue selling even though it may be risky to do so. The opportunity cost incurred by sellers (in choosing to remain open for business) is time that could be spent preparing for the crisis in itself. In the case of Hurricane Harvey, the flooding presents immediate physical harm to sellers. Disruption to transportation also factors as a cause in making supplies more difficult or expensive to procure. Through this lens, it only seems fair that prices are raised to compensate for the increased difficulty of selling goods. This of course, precludes sellers that have vastly inflated the price in order to obtain a profit beyond what would be normally expected – true price gouging.
However, from a consumer’s point of view, goods such as bottled water and canned food are priced at five to ten times what they have become accustomed to. Given that these are necessities of life, and not frivolous purchases, the knowledge that sellers are being adequately compensated for their services is likely to be of little consolation.
The aforementioned price controls work by mandating a maximum price on certain goods, and often take the form of prohibiting increases in price beyond a set limit, usually 10%, or by prohibiting “exorbitant or excessive” price increases.[ii] However, if sellers don’t find themselves being adequately compensated for the risk or difficulty they incur when selling the item, we can expect them to exit the market and no longer sell items, meaning that consumers may actually be worse off as they no longer have access to the desired goods.
There seems to be a very fine line between what level of price increase is acceptable and what is not. There is some element of ethics involved with these decisions too – clean drinking water is a basic human right, and to deprive people of access to water cannot be seen as an acceptable state of affairs. Inversely, by intervening in the market, there is also a risk more people could be made worse off by further reducing supply.