The best way to get people to use less and produce more is to allow prices to rise. For example, say a Middle East conflict restricts oil supplies and causes prices to rise. The effect of higher prices for oil is that it gives individuals incentive to eliminate or reduce the low-valued uses of oil. For example, a low-valued use of oil is for homeowners to allow the heat that it generates to seep through walls and leaky windows. Higher oil prices create incentives to homeowners to install insulation. Higher gasoline prices force motorists to economize by taking measures such as carpooling and taking fewer low-valued trips.
Suppose that in the wake of a natural disaster -- in the name of anti-gouging or some other nonsense -- government officials mandate that prices cannot rise. What's the economic message? The mandate encourages people to continue their consumption as if the disaster didn't happen. Let's use gasoline as a concrete example. Suppose a family is fleeing a pending hurricane and has a half-tank of gas, plenty to get them to a safe destination, but they would feel more comfortable topping off the tank. If the price of gasoline remained at a pre-hurricane price of $3 a gallon, they might do so. But if the price shot up to $5, they'd wait until they arrived at their destination. Their decision has the effect of making more gasoline available for others. So here's my question: Which alternative is preferable for a family, fleeing the hurricane with their gas gauge showing nearly empty, gasoline available at $5 a gallon or gasoline unavailable at $3?
You might say that when there's an emergency, the government should step in to prevent prices from rising by establishing price controls. During the 1970s, the Nixon and Ford administrations, in reaction to a jump in fuel prices caused by cuts in production by OPEC, did just that. Price controls led to massive shortages, long lines at gasoline stations and massive misallocation of resources.
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