As Hurricane Dorian stays on course to blast parts of the U.S., the National Hurricane Center has urged Floridians to brace themselves for trouble. Florida’s Attorney General Ashley Moody has sprung to action, announcing that the state government will activate its price gouging hotline to enforce its anti-price gouging law — one meant to prevent desperate Floridians from being overcharged for essential goods, like water and generators. And it certainly sounds like the humane way to go, but it could very well end up doing far more harm than good.
States in Dorian’s path — Florida, Georgia, and the Carolinas — each have some form of an anti-price gouging statute in worry that profit-hungry businesses may take advantage of the situation and make affordable products suddenly unaffordable.
But by putting a ceiling on prices for goods, these states are messing with the current system that makes these goods plentiful. After all, high prices in a particular area signal to entrepreneurs and businesses that there’s gold to mine there, so they’ll respond to those opportunities by entering that market. Someone who sells gallons of water might drive their product from Virginia to Florida if they can make $50 dollars a case, but they very well may stay home if they can only make $10. Sure, it might sound like corporate greed, but letting them make that extra money will likely result in a significant increase in those goods and services — a sorely-needed uptick in times of crisis.
As new sellers continue entering the market, prices will inevitably be driven down, mitigating against the very prices that anti-price gouging laws deem “unconscionable.”
Dr. Steve Horwitz, Professor of Free Enterprise at Ball State University, says this isn’t — of course — a perfect system. But it’s still the best we have. “We have no other way of making sure that increases in the demand for water, gas, etc. are translated into increases in supply. If you don’t want to run out of supplies, you need to let prices do their job,” he told me.
The cost of not letting prices do their job is pretty high. In fact, some economists estimate that if there had been a national price-gouging law at the time of Hurricanes Katrina and Rita, the economic losses they caused would have been increased by nearly two billion dollars.
Not only do prices serve as a kind of Bat-Signal for essential goods and services, they also play an important role in the allocation of these important resources. At the end of the day, higher prices prevent people from overusing. When prices increase, consumers think a little harder about what they buy and reallocate their funds to reflect their priorities, cutting back on the things they consider more frivolous. This helps make sure people aren’t taking more than they really need — which isn’t a big deal until every drop of fresh water in a disaster area counts.
But when prices can’t rise, people don’t have a reason to change their behavior. A person who only really needs one case of water may only buy one for $50, but they may buy three for $10. Price increases force people to make tough choices and cut back their spending habits to focus on what’s essential. This ensures that the already heavily-constricted supply of goods doesn’t deplete even faster.
Regardless of how one might feel about “price gouging” behavior or the people who engage in it, the policy should be designed to create the best outcomes possible. Anti-price gouging laws are often passed with the best of intentions, but intentions don’t put food on the table. These laws will likely make the situation far worse and magnify the damage rendered by Hurricane Dorian. After all, a $10 cap on the price of water doesn’t actually do these people well if there isn’t any water to buy.
Trace Mitchell is a Young Voices contributor, Research Assistant with the Liberty and Law Center at George Mason University, and JD candidate at the Antonin Scalia Law School. His work has appeared in the American Banker, Chicago Tribune, Houston Chronicle, and Orange County Register.
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