Texas has laws against price gouging at a time of natural disaster and Texas almost certainly shouldn't – and those of us who say so are getting shouted at rather a lot as Houston deals with the effects of Hurricane Harvey. Sadly, all too many of the baying mob haven't grasped the point being made: This is a disaster, so we should be using all tools at our disposal.
It is not being suggested, not by me and not by any of the other few ready to put their heads up over the barricades (honorable mentions going to Mark Perry, Ryan Bourne, Jeffrey Dorfman, Don Boudreaux, Michael Giberson and Dan Mitchell), that we should only be using the price system here. We're all absolutely delighted that FEMA will be trying to truck needed supplies in, that charities and just plain good-hearted folk are doing the same, that Walmart and Waffle House are swinging their emergency plans into action and so on. I most certainly cheer the arrival of the Cajun Navy, which did such good work a year ago in Baton Rouge, La.
I'm even on standby myself, from 5,400 miles away, to aid the power company in surveying damage to the system so it can be repaired (the modern miracles of smartphones, drones, and the internet aiding here).
It's just that we're insistent that more should be done, or that the law should not try to jail those who are doing more. Which is where our insistence upon prices comes in.
Those little diagrams at the start of the Econ 101 class (supply, demand, price) are not optional extras to our universe, they are instead accurate descriptions of how we humans interact with it. If and when demand rises then price rises, this in turn encouraging an expansion of supply. Thus why we desire to have price flexibility in the face of either changes in supply or demand.
Consider Houston right now in the wake of Hurricane Harvey. It seems a good bet that the tapwater supply is disrupted -- flooding has a tendency to do that. We would therefore assume the demand for bottled water has risen – the sensible who normally hydrate from that wondrous invention, the municipal water supply, will not be able to do so, thus increasing the demand for the bottled stuff. Equally, on the other side, there's going to be a certain difficulty with supply at present -- roads 5 feet underwater don't exactly help trucking.
We thus desire to do two things simultaneously. We want to restrain demand to only the really important things and we want to incentivize greater supply.
Which is exactly what a price rise does for us.
With water at (just to make up a price) $99 a case, people are only going to buy it for drinking water, perhaps only in sippy cups. Which is excellent -- we want whatever limited supply of potable water (we've really plenty of non-potable around, that's the basic problem) there is in place to be used for that most valuable use, being potable. We've achieved one of our goals therefore, by allocating that scarce resource to its most valuable use: keeping people alive.
We also want to increase supply, though, and being able to sell in Houston for $99 something bought for $9.99 in Beaumont (again, just to invent an example) might well get a few boats carrying loads in – although quite possibly not from Beaumont. Thus, by allowing prices to rise, we've at least potentially increased supply.
Our price system, operating without constraint, is thus achieving the two things we desire, a curtailing of demand through rationing to only truly important uses, and a rise in supply.
"But," goes the cry, "this isn't fair!"
Indeed it isn't, and ain't that a shame, fairness not being a notable feature of this universe we're struggling to inhabit. All we can do is the best we can. Which is, again, why I insist that there should be variable prices, why there should be no laws against price-gouging. Because this really is a disaster, there really are significant shortages in Houston right now, we really do want to solve them. Which means that we should be using all of the tools at our disposal.
Certainly FEMA should be taking action to distribute bottled water -- We pay our taxes for it, so why not? There's always the hope they'll do better than Brownie's heckuva job during Hurricane Katrina. Charity is also great, the human spirit at its very best, as with responders actually going in, business emergency teams, and plain good folk helping out the neighbors.
But none of that is inconsistent with also using markets and prices to aid in solving our problems, nor is using variable prices – yes, price-gouging – something which prevents, deters, or even lessens the amount of those other possible solutions going on. They're all cumulative, they all add another brick in the wall trying to hold back that tide.
One final observation: If all of those non-market, non-price methods of increasing supply work, then there is no possibility of price-gouging, is there? You can't whack up the price of something when there's a copious supply.
This also works the other way around: If there is gouging, then there isn't a copious supply, and clearly those other methods are not working well enough. To argue, therefore, that we must ban gouging because those other methods are better doesn't work, does it? Because if those other methods were working, then there would not be gouging.
We should not have laws against price-gouging, because such variability in price is part of the solution to disaster-induced shortages.
Of course, we'd all prefer those other methods worked perfectly. But since higher prices can only be imposed if those other methods aren't working, then why the hell do we have laws against our only remaining solution?
Tim Worstall (@worstall) is a contributor to the Washington Examiner's Beltway Confidential blog. He is a senior fellow at the Adam Smith Institute.
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