Texans survived their deep freeze, but it wasn’t easy. Last week, winter storms and bitter cold strained the state’s resources. By now, everyone knows about the electricity disaster. Millions of Texans, including some of my colleagues, went without power for days. Temperatures dropped below freezing indoors. In West Texas, we even dipped below zero degrees Fahrenheit.
As we survey the damage, we've been talking about another disaster that plagued the state: price gouging.
Some households never lost power, but now, they’re confronted with a surprise cost: electricity charges running into the tens of thousands of dollars. Politicians are predictably outraged. Sen. Ted Cruz lambasted electricity providers on Twitter. The unfairness of an exorbitant bill, which may very well be larger than household savings, strikes our hearts.
But these households are not the only ones who suffered. Households that couldn’t get power, despite their willingness to pay much more, deserve our sympathy, too.
At the end of the day, it comes down to basic economics. It’s all supply and demand. On a weekly basis, the supply of power probably isn’t too responsive to price because it’s hard to ramp up generation on short notice. But demand was certainly price-sensitive. Add that to the big demand spike caused by the bitter cold, and you’ve got the classic makings of a shortage.
Resources must be allocated somehow. Usually, they’re rationed based on prices. Those who are willing to pay for a good or service get it. But a willingness to pay often changes depending on background circumstances. Following the long cold spell, electricity demand skyrocketed. The problem is, there are many laws and other regulations on the books that prevent charging market prices for electricity. If the price can’t rise to ration the scarce good, the consequences are simple and obvious: People will have to go without.
Some people, perhaps inadvertently, signed contracts to pay market prices for power. These are the households that continued to get electricity, even during the days when the strains on the power grid were highest. Electricity, always a scarce good, became hypervaluable. Some households continued to receive it. The only way this makes sense is for them to pay a price high enough to justify their continued services, as opposed to the millions who weren't so fortunate.
Dishonest contractual practices should always and everywhere be condemned. In fact, the common law often treats such contracts as invalid. If consumers were fooled by the fine print, they have a right to be outraged. But we must carefully separate the legal from the economic arguments. For a week, electricity was in such high demand that its price was several orders of magnitude larger than normal. The question of who gets what, and why, became more stressful, but not more complicated. The privilege must be paid for.
What’s the solution? That depends on what you think is equitable. One possibility is for the state of Texas to assume the excess financial burden. It’s at least plausible that this is the kind of risk you’d want the taxpayer to insure. Another is increasing contractual transparency for basic utilities. If households didn't know what they were getting into, that should be fixed.
But we mustn't escalate this into a war on economics. No amount of legal hand-waving can eliminate basic trade-offs. Texans should oppose any efforts to strengthen price-gouging laws. Once again, if you’re not rationing by price, you’re rationing by quantity. Legal maximum prices make it harder for consumers to get all the electricity they want, not easier.
We often take issue with the distribution of resources in a market economy. This is understandable. As citizens, equity is a basic concern. But equality in misery is hardly a noble goal. Texans learned the hard way that they’ve got a power problem. We need to fix it. But crusading against supply and demand won’t help anybody.
Alexander William Salter is an associate professor of economics in the Rawls College of Business at Texas Tech University, the comparative economics research fellow at TTU’s Free Market Institute, and a Young Voices senior contributor. Follow him on Twitter @alexwsalter.
