‘Price gouging’ in storm’s wake

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In the wake of the hurricanes in Florida, the state’s attorney general has received thousands of complaints of “price gouging” by stores, hotels, and others charging far higher prices than usual during this emergency.

“Price gouging” is one of those emotionally powerful but economically meaningless expressions most economists ignore, because it seems too confused to bother with. But the distinguished economist Joseph Schumpeter once observed it is a mistake to dismiss some ideas as too silly to discuss, because that only allows fallacies to flourish. And the consequences can be very serious.

Charges of “price gouging” usually arise when prices are significantly higher than what people have been used to. Florida’s laws in fact make it illegal to charge much more during an emergency than the average price over some previous 30-day period.

This raises questions that go to the heart of economics: What are prices for? What role do they play in the economy?

Prices are not just arbitrary numbers plucked out of the air. Nor are prices you happen to be used to any more special or “fair” than other, higher or lower prices.

What do prices do? They not only allow sellers to recover their costs, they force buyers to restrict how much they demand. More generally, prices cause goods and the resources that produce them to flow in one direction through the economy rather than in a different direction.

How do “price gouging” and laws against it fit into this?

When either supply or demand changes, prices change. When the law prevents this, as with Florida’s anti-price-gouging laws, that reduces the flow of resources to where they would be most in demand. At the same time, price control reduces the need for the consumer to limit his demands on existing goods and resources.

None of this is peculiar to Florida. For centuries, in countries around the world, laws limiting how high prices can go has led to consumers demanding more than was supplied, while suppliers supplied less. Thus rent control has consistently led to housing shortages and price controls on food have led to hunger and even starvation.

Among the complaints in Florida is that hotels raised their prices. One hotel whose rooms normally cost $40 a night charged $109 a night and another whose rooms likewise normally cost $40 a night now charged $160.

People long on indignation and short on economics may say these hotels were “charging all that the traffic will bear.” But they were probably charging all the traffic would bear when they charged $40 a night.

The real question is: Why will the traffic bear more now? Obviously because supply and demand have both changed. Since both homes and hotels have been damaged or destroyed by the hurricanes, there are now more people seeking more rooms from fewer hotels.

What if prices were frozen where they were before all this happened?

Those who got to the hotel first would fill up the rooms and those who got there later would be out of luck — and perhaps out of doors or out of the community. At higher prices, a family that might have rented a room for the parents and another for the children now will do with one room because of the “exorbitant” prices. That leaves a room for someone else.

Someone whose home was damaged, but not destroyed, may decide to stay home and make do in less than ideal conditions, rather than pay the higher local hotel price. That too will leave another room for someone whose home was damaged worse or destroyed.

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