Hurricanes and Prices
In the wake of Hurricane Harvey, I’ve heard a lot of people (including my capitalist friends) villainize businesses that raised their prices during the storm. I even came across a picture someone posted suggesting all businesses that raised their prices should be shut down (although it’s buried in Facebook history now).
The general disdain and animosity towards people trying to operate in a (mostly) free market shows to me an acute lack of understanding of the role of prices and more importantly, a broad lack of understanding of economics.
Is it really a bad thing when prices fluctuate with supply and demand? It is certainly an inconvenient situation with a salary like mine if gas prices rise to $10/gal or water goes up to $20 per bottle, but in a market economy, I won’t agree to those prices unless I am better off making the transaction than without making the transaction.
So why is it okay that prices go up? Well, prices tell sellers where to send their products. If scarce resources that have alternative uses can be sold for a higher price and profit in Texas than in Ohio, more resources (water, fuel, foodstuffs, etc.) will be sent that way. As a storm approaches and infrastructure becomes damaged, the transportation of these resources incurs a higher cost. So pretty soon, the cost of getting fuel or water to an area may exceed the price you used to pay (grocers tend to operate on small margins per product). Businesses have an incentive to operate for a profit and not a loss, so they should raise their price at least over the cost, but likely not over their competitor’s prices lest you just go shop somewhere else.
But what about the stuff they already have? I get it. They have had product for days or weeks now and just as the storm or disaster hits, they jack up the price. Remember that businesses are people operating with the same incentives as everyone else. Max reward, least risk, lowest cost. The owners and operators are taking a risk continuing to operate with the looming or current disaster. They may be putting themselves or their livelihood at risk when a few days later they are unable to resupply due to failed infrastructure. Their rent payments are due regardless of how much they sell.
If you feel like you are being exploited ask yourself this question: would your life be better if they chose to not sell you the supplies and either took it home themselves or shut their doors to sell it later when the risk is lower and the profit at the lower price is worth their troubles?
The government is apparently looking to strongly penalize companies for acting out of self-interest. This adversity to price fluctuations is an economic disaster waiting to happen. Imagine if prices were kept where they were a few weeks ago, but costs to operate in the area continued rising. There could easily be a shortage of supplies that would leave people worse off than they were paying what the sellers wanted. A company won’t continue operating at a loss.
A quick story about the city Antwerp in the 16th century: They were under siege by a Spanish blockade whose goal was to starve them out. Blockade runners continued smuggling food into the city allowing Antwerp to survive the siege. As you can imagine, the price of food rose drastically since it was only worth the risk to the blockade runners if there was a high enough profit to be made. The city authorities fixed this problem by imposing a price ceiling on food items with strict penalties for those who disobeyed and the results were pretty predictable. Robert L. Schuettinger and Eamonn F. Butler described it saying that “the city lived in high spirits until all at once provisions gave out.” The risk wasn’t worth the rewards for the smugglers and Antwerp soon after surrendered to Spain.
Want to learn more about the role of prices and price controls? Check out Dr. Thomas Sowell’s Basic Economics in our reading list. (You’ll find the anecdote above in the first section).
