There’s a lot of concern over “price gouging” in the wake of Hurricane Harvey. Some people, including Best Buy as evidenced in the tweet below, are using the hurricane as an excuse to raise prices on necessities like water to seemingly extreme levels.
The problem with this analysis is that it ignores the function of the price mechanism. Scarcity due to the hurricane has caused the price of clean, fresh water to increase, but that’s exactly what we should want to happen. If the price remained the same as it did during times of surplus prior to the hurricane then the water would be nearly impossible to find as the people who got to the stores earliest would simply buy all the water, and it would likely be wasted on comparatively frivolous ends as the incentive to conserve would not be as great.
The high price sends a signal, however, that water is scarce and needs to be used only for its highest maximum utility, such as drinking, and it means that people will actually be able to find clean drinking water because it’s unlikely that people are going to spend their money to use water to wash their windows or other comparatively unnecessary ends during the crisis.
High prices also send a signal to entrepreneurs from elsewhere in the country that a profit can be made by supplying water to areas affected by Hurricane Harvey. This will increase the supply of clean drinking water, which is sorely needed, and as more entrepreneurs enter the market with clean water the price of water will decrease. This is how the market regulates itself during a disaster. If the government steps in and starts rationing water, on the other hand, there is no incentive for entrepreneurs to enter the market and increase the supply of water, so people who need water remain dependent on charity and the government, which means they likely won’t be receiving enough, or high-priced black market water, which they probably can’t afford.
Natural disasters cause immense pain and suffering for people but disrupting the market’s signaling just draws out the pain for the poorest and worst off for longer than it would otherwise be. There’s no reason for Best Buy to have apologized for providing goods that people need, but such is politics in America that talking about helping people is seen as being better than actually helping them.
Thomas Sowell said, “The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.” Hurricane Harvey and those crying about “price gougers” are proving him right yet again.