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Hurricane Matthew brings Price Gouging to the East Coast

By: Frank Yunker

Date: 2016-10-13

States with Anti-Gouging laws (in blue)
States with Anti-Gouging laws (in blue)

Hurricane Matthew last week brings to light a hot topic in economics… price gouging. To ask a typical person-on-the-street, you might find a lot of folks in favor of those anti-price-gouging laws. And, in fact, more than half the states have some form of Anti-Price-Gouging laws. Why? Because politicians consider the emotional appeal of laws and not the basic economics behind them. Let’s consider the following:

The storm or power outage or catastrophe that caused the price-gouging incident often brings additional hardships to the store owner. Supply chains are temporarily cut off or reduced. If the store owner knows the replacement cost of the product has gone up, he would have to raise the prices in order to afford to buy more when he runs out. (If a gas station buys at $2 and sells at $2.50 he makes a profit. If a storm hits and he knows the cost of replenishing his tanks is $3 a gallon, why sell his current stock at $2.50? He would not make enough to replace the tank.) In addition, the store owner may be making additional sacrifices in order to keep the store open, so that additional effort is rightfully offset by additional profit. If not for additional profit, the store owner might not get out of bed, shovel his driveway and carefully drive through snowy streets just to open the store. He would have every incentive to make some hot cocoa and watch movies with the kids.

The fact is, many store owners recognize that loyalty to their customers is paid back with loyalty. The short term gains from price gouging may be offset by long term losses when customers remember how they were treated during the emergency. They may pay the extra price in gas during the emergency, but when normalcy returns they may choose another gas station for months to come. Businesses that operate in the long run won't price gouge. Walmart and Home Depot don't price gouge. Instead, the stock up in advance once the weather is on the radar screen. They prepare better and faster than the Federal government because they already know which items are popular in an emergency and how quickly they are likely to get a replenished stock.

Now, back to price gouging. Price is a signal to the market. A spike in price signals other sellers that they should enter the market and it signals exactly which goods are expensive and needed and which goods are not. After Super Storm Sandy, I entered the generator market and supplied one to my brother-in-law. Another friend went to Walmart, bought up all the gas cans he could find and drove down to New Jersey with over 100 gallons of gas in the back of his pick-up. His family needed gas. If prices had not risen, we would not know the things that people desperately needed and - of course - stores that supplied gas or generators would have run out of inventory quickly. My generator was used to pump out multiple basements in the neighborhood where my brother-in-law lives. Why? Price was high. Supply was non-existent. First-come, first-served would determine who buys but not who needs. Walmart and Home Depot did not raise price. Inventory flew off the shelves. So, the person needing the generator to keep their oxygen tank working may be shut out if they do not get to the store first. If prices rise, the desperately needy has a better chance of arriving at the store to find a generator and he would have the choice to buy or not buy. An empty shelf gives him no choice.

Emotionally, people discuss the price gouging of basic needs. Let us consider a family in Florida and how they need food... yet they knew that Hurricane Matthew was 1 week out... 3 days out... 2 days out. Why did they not stock up when prices were normal? Why wait until an emergency crisis situation and then complain that you cannot get what you always wanted at a price you used to pay? We have food cans in storage. If a power outage happened, we would not immediately need to run to the store. We have bottles of water. We are prepared. Anti-price-gouging laws actually encourages you to remain ill-prepared. Is that good government?