Cracking down on price gouging in the aftermath of disasters can do more harm than good

The The Morality of Price Gouging by Patrick McLaughlin and Stephen Strosko of Mercatus.

"As new stories surrounding hurricanes continue to surface, it is amazing to hear how so many people are pulling together to help the people impacted by these storms.

However, for every story like that of J.J. Watt raising over $30 million to support the victims of Harvey, there is a troubling counterpart. For example, Texas Attorney General Ken Paxton cracked down on price gouging during the hurricane's aftermath, with fines reaching as high as $200,000. This may sound justifiable, but it does more harm than good.

It's fine for Paxton to play the morality card when asking Texans not to raise prices during a disaster. Yet what politicians typically view as price gouging during a catastrophe is actually a necessary function for allocating scarce goods to the people who need them the most. Both sides of the coin – morality and gouging – are needed post-disaster.

Price gouging is never an easy topic to discuss. When an individual raises the price of a necessity like water or gas during a natural disaster, it is very easy to dismiss such an action as heinous. In reality, however, such an action is better described as price "gauging" than price "gouging." In fact, without the information produced by price gauging, the victims of natural disasters would be even worse off.

Consider two scenarios – one without price gauging, and one with.

During a natural disaster, goods are destroyed. Homes, food, possessions, gasoline and many other items become scarce in mere minutes. At the same time, more people will demand these goods during times of natural disaster, either to replace what they've lost or in anticipation of potential loss. Soon, a basic economic problem emerges – a lot of people want something, but there isn't a lot of that something.
 

Let's use gasoline. While everyone may want gasoline during a natural disaster, some people absolutely need gasoline. Imagine Frank and Betty both want to travel north away from the disaster and are looking to fill up their cars with gas. Frank's car already has a half-tank of gas – enough to get out of the area – but he'd prefer to have a full tank. Conversely, Betty's car is running on fumes and needs that gas just to make it far enough away from the storm to be safe.

If Frank arrives at the gas station and sees a reasonable price for a gallon of gas, he will fill up his car. However, if Frank sees that a gallon of gas is close to $10, he will probably just use his half-tank of gas to drive north until prices are more reasonable.

The difference between these two scenarios can make all the difference in the world to Betty.

In the first scenario, if Betty arrives at the gas station behind Frank (along with countless other drivers in Frank's same situation), there is a very good chance that there will be no gasoline available, especially when a natural disaster disrupts the supply chain by flooding roads or limiting other transportation infrastructure. People who preferred to buy gasoline, but didn't absolutely need it, may use up all of the available supply.

Even though the high gasoline prices may seem as if they are exploiting people like Betty, in reality, it maximizes their chances to get it. In essence, price gauging – that is, using prices to produce information that separates those who absolutely need a good from those who merely want it – will help those who need gasoline the most.

During a natural disaster, not every situation will fit in the cookie-cutter design that is laid out above. Many times there will be a scenario when a person both needs an item and does not have the means to obtain the item. Grabbing your wallet may not be a priority during a category-4 hurricane, and paying $99 for a case of water may not be possible when there is only $40 sitting in your checking account.

This is why price gauging needs to be paired with basic human morality. If a person is clearly in need during a natural disaster, individuals need to step up and help them. This is very different than government officials demanding that a person helps everyone. If a gas station manager is required to keep his prices low during a natural disaster, there is a good chance that he will run out of gasoline because he is required to help everyone equally, instead of being allowed to selectively help those who are the most in need – as most people would in a life-or-death situation.

The solution is simple. Allow the good in every human to naturally shine through during a disaster. Sadly, these hurricanes will not be the last disaster that this country faces. In the aftermath ahead, let those who have the goods that people need allocate them wisely and charitably, both through price gauging and through gifts. Put some faith in humanity, the good in each and every individual, and in sound economic theory."