It is getting ugly in the northeast in the wake of Hurricane Sandy. This story details fights at gas stations as people line up for fuel for their cars and generators. The state troopers have been deployed to gas stations to protect people.
The irony of these stories is that there is absolutely no reason for shortages in a truly free market economy. If the market were allowed to work, there would be plenty of gasoline and there would be no fights and no need for state troopers. Let me explain.
The source of the problem is government. Governments in New Jersey and New York have what are called “price gouging protection” laws. New Jersey is already investigating retailers who are charging more than the fair market price.
Laws against price gouging seem, at an emotional level, to seem “fair.” If a gas station charged $4.00/gal before the hurricane, how can it possibly justify charging $8.00/gal (or more) immediately after? Isn’t that taking advantage of people?
The fairness argument completely ignores the realities of the world and ignores the fact that “price gouging” (ie, temporarily charging higher prices) helps consumers much more than it hurts.
In a controlled market, without “price gouging,” there are shortages. Shortages hurt people by not allowing them to buy the stuff they want. Controlled economies like Cuba and North Korea have anti-price gouging on a national scale, but of course people cannot buy anything beyond the most basic items. So, are consumers happier with a controlled economy or in a free market economy?
The entire free market system is about matching willing buyers with willing sellers. You may think that the “fair” price of an ipads should be $50, but the reality is that they cost several hundred dollars, even used on Ebay. The only “fair” price is what the market will bear. Now let’s say there is suddenly a shortage of the vital components in all tablets. Apple and Samsung and other providers all announce that because of this shortage they have to double their prices. Is this “price gouging?” No, it is simply a reality of the market.
Now the great thing about a free market is that some enterprising company will come up with a way to build tablets using new components, and prices will come down. Apple and Samsung will either switch to the new technology or they will go out of business.
The exact same principle applies during a hurricane or other natural disaster, or it would apply if government did not get in the way with regulations and anti price-gouging laws.
There is a huge demand for gasoline in the northeast right now, right? How would a truly free market deal with this? Entrepreneurs would be renting gasoline tankers filled with gasoline and driving them to New Jersey. In fact, they probably would have arrived the day after the storm. And in a truly free market, there would be thousands of them deployed wherever people needed them. These entrepreneurs would develop mobile pumping mechanisms that would safely allow you to drive up to the tanker and fill up your car.
Of course, you would pay $10/gallon or perhaps even more at the beginning. But as more and more tankers dotted the landscape, the price would come down, and after a few days you would probably only pay the current market price of $4/gallon.
So, why don’t people do this today? Government regulations prevent you from pumping gas from a tanker. Obviously, there are safety concerns, but the technology to make such mobile pumping safe is not rocket science and could be developed. And of course you would be considered a “price gouger” and might be thrown in jail.
So, the bottom line is that government once again is preventing consumers from getting what they need. Such policies, in addition to causing inconvenience, are a threat to people who cannot be without power for days on end. These people would happily pay $10/gallon temporarily if they knew it would help keep them alive.
There also is huge shortage of batteries, candles, water, food, chain saws and other necessities during a storm. There is absolutely no reason — except for anti-price gouging laws — that trucks filled with such products do not flood into New York and New Jersey. In fact, the black market does of course offer these things, but prices are much higher than they would be if such commerce were legalized.
The bottom line is that supply will follow demand if the market is allowed to work. People who want gasoline, batteries and chain saws will get them if we allow willing sellers to connect with willing buyers. And the reality is that any price-gouging that takes place will be temporary. Within a week or even less, the market will bring prices down and the tankers and trucks selling goods will disappear as the electricity gets turned on and markets return to normal.
The market is the cure if we allow it to function.
I’d like to mention three more fallacies that you will be hearing during this disaster. One, that it will be good for the economy because of “stimulus;” two, that FEMA is doing a great job and three, that this “proves” that storms are becoming more frequent and more powerful. These fallacies are successfully debunked here.
One the subject of good news, however, the Church is once again proving to be the most efficient responder of all to natural disasters. You can read more about the Church’s heroic response here.