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Prices and the Sharing Economy

Here’s a follow-up letter to my new correspondent:

Molly Chaisson

Ms. Chaisson

I appreciate your follow-up to my earlier note.  You write that “the hardship of tragedies like Harvey should be shared.”  I fully agree.  Note, however, that such sharing is best promoted by letting prices rise to whatever levels they reach on free markets.

If prices in south Texas are not prevented by government from rising, suppliers in Iowa, Virginia, New York, and other places distant from Texas are enticed to shift some goods to south Texas and away from these markets that are not directly affected by Harvey.  The result is that I and millions of other Americans who do not live in south Texas nevertheless shoulder some of south Texans’ burden.  We do so because, with some supplies shifted from our locales to south Texas, prices in our locales rise.  Those of us outside of south Texas must pay higher prices for the likes of fuel, food, and building materials.  We are led by these higher prices to reduce our consumption so that greater amounts can be made available for south Texans to consume.

But if government keeps prices in south Texas from rising, then suppliers outside of south Texas have less incentive to shift goods to that region from distant places such as Virginia and New York.  Prices in these distant places don’t rise as much as they otherwise would.  I and others who live outside of south Texas are thereby spared by Texas’s own prohibition on “price gouging” from having to share more fully in the burdens of hurricane Harvey’s devastation.

While sparing Virginians, New Yorkers, and other non-Texans the trouble of having to share in the hardship now suffered by south Texans is obviously not the intent of Texas’s prohibition of ‘price gouging,’ sparing us non-Texans this trouble is nevertheless one of that prohibition’s unfortunate effects.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030