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How Likely Are Prohibitions On “Price Gouging” to Help the Poor?

On this EconLog post by David Henderson, commenter David Cantor wrote: “There is a further consequence to these very high prices. Matching supply and demand through high prices also means that scarce resources are preferentially allocated to the well-off. I find this morally repulsive.”  Mr. Cantor’s concern is understandable.  And his comment prompted me to offer this reply (slightly expanded here), none of which is new but all of which warrants repetition:

Keep in mind that even the expectation of very high prices causes quantity supplied (and quantity demanded) responses before natural disasters strike. These responses, it can be argued plausibly, occur even for many disasters that strike without specific prior warning (such as earthquakes in California), but these responses without question occur for natural disasters, such as hurricanes and blizzards, for which their victims have prior warning.

Take hurricane Irma. Roads, bridges, and the electrical grid throughout Florida are today (September 6th) all fine. Irma is still hundreds of miles away from there. Yet the expectation that there will be very high prices several days from now, immediately after Irma’s anticipated landfall in south Florida, surely causes merchants to bring to south Florida many more supplies of bottled water, propane, and other such goods today – more supplies than they would have brought in today were no hurricane bearing down on that region. If Irma hits as anticipated, south Floridians will therefore be supplied with staple goods better than they would be supplied were prices there not allowed to rise after the hurricane strikes.

(Also note that, if prices aren’t allowed to rise, fewer merchants with available inventories will bother to open their stores after the storm: more merchants than otherwise will remain at home with their families, not bothering to brave the downed power lines and obstructed roads to get to their stores. Relatedly, if prices aren’t allowed to rise, merchants will, before the storm strikes, spend less time and fewer resources guarding their inventories against the prospect of being damaged by the storm.)

Importantly, prices in south Florida start to rise in anticipation of the hurricane even before it strikes. These price hikes not only further incite suppliers to bring more provisions to south Florida, they incite consumers to use supplies of those goods more sparingly – that is, more “efficiently” – than they would have used them were the prices not allowed to rise.

As for the rich having ‘unfair’ access to goods if the prices of those goods are allowed to rise to market-clearing levels, this possibility (which no one can deny) must be weighed against the fact that prohibiting price hikes almost certainly ensures that available supplies in the disaster regions are kept fewer than they would be absent the prohibition of price hikes.

But there’s a relevant question here: how can you be sure that the well-off will not have even greater advantages over the not-well-off in acquiring goods that are in short supply because of the prohibition on price hikes? It’s possible that an effective prohibition on price hikes will result in the poor getting a greater quantity of these goods than they’d get absent the prohibition, but arguments in favor of prohibitions on so-called “price gouging” typically merely assume that this outcome will arise. Yet the validity of this assumption can plausibly be questioned. Listed below are only some possibilities that opponents of “price gouging” too often fail to consider.

With prices kept by government dictate from rising…

… merchants hoard more of their inventories hoping to sell them at black-market prices, which will be even higher than prices would be were there no government prohibition on price hikes;

… merchants give family and friends – and themselves – greater access to available supplies the prices of which are kept artificially low by the prohibition on “price gouging”;

… merchants give political officials, business acquaintances, and celebrities greater access to available supplies the prices of which are kept artificially low by the prohibition on “price gouging”;

… the poor, because their homes and vehicles suffer, on average, greater damage than is dealt to the homes and vehicles of the rich, are less able to get quickly to the front of the queues of consumers waiting to buy goods in short supply;

… the rich, anticipating the queues that will arise because of the prohibition on “price gouging,” hire people to rush to stores immediately after the storm passes in order to buy supplies for the rich; (and the amounts that the rich will thereby purchase are likely to be greater, because of the artificially low prices, than the rich would buy if prices were allowed to rise);

… the rich – again because their homes are less likely to be severely damaged by the storm than are the homes of the poor – simply won’t need plywood and other building materials as desperately as will the poor;

… the rich, because they are more likely to have generators than are the poor – and to have more storage space (including refrigeration and freezer space) in their homes – will be better provisioned than the poor after the storm and, thus, will be less affected than are the poor by any government-induced shortages of goods;

… the rich are better able than are the poor to arrange and pay for ‘special’ or personalized deliveries of goods from a distance;

… compared to the poor, the rich will disproportionately evacuate from areas likely to be struck by a severe storm, leaving in the storm’s aftermath disproportionately large numbers of the poor and non-rich competing for bottled water and other goods that are in short supply in the ravaged area.