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Sandy and Price Gouging in New York and New Jersey

November 4, 2012 - 1:43pm
Nick Coons by Nick Coons


The common response to raising prices in a disaster scenario is one of disgust, that shopkeepers are greedy, out for themselves, and taking advantage of the situation in order to line their own pockets. But increased prices in such situations are actually a good thing.

In New York and New Jersey, the governors have claimed that they will prosecute anyone for raising gas prices in response to the storms. This is sure to cause shortages. But let's examine what happens.

Market prices are set based on supply and demand; this is basic Economics 101. Let's look at a certain commodity, like gasoline. And let's say the average price is $4/gallon. This pricing is based on the amount of gas available, the cost to bring it to market, and how much of it people want to buy. These variables fluctuate all the time, which is why gas prices move around frequently.

When a disaster strikes, if the supply chain isn't affected, then prices won't move significantly. The same forces that set the price to where it was before the disaster are still in effect. It's only when the supply decreases that the prices will go up. For the most part, this is because it's more expensive to continue to bring in supply when disasters occur (i.e. pipelines break, roadways are flooded or blocked, transportation is more dangerous). Certainly there are opportunitists, those who have pretty much the only supply available and will raise the prices simply to make a quick buck, but the effects of the pricing mechanism is the same.

In the market, prices are not just what we pay for goods and services, they are signals that direct resources to where they're needed most. If apples cost $5/pound, and at this price apple growers are getting rich because the revenue far exceeds the costs, the opportunities cause other entrepreneurs to engage in apple growing in order to also make large profits. As more people begin growing apples, the increased supply lowers prices. With lower prices, other entrepreneurs don't continue to become involved in apple growing, and so the price reaches an equillibrium, where it will stay so long as supply and demand stay the same. The high price was a signal to the market that more apples were needed.

The non-disaster price of gas is where it should be based on supply and demand (not taking into account government regulatory and tax considerations). When there are disasters and supply channels are affected, rising prices are signals to providers that they need to provide more gas to the region. Gas providers will send the gas wherever they can make the most amount of money. If they can sell the gas for $4/gallon in a disaster zone or $4/gallon in a non-disaster zone, they have fewer costs and risks operating in the non-disaster zone, so they will not redirect any resources to the disaster zone. But if prices rise beyond a certain threshold, they will begin redirecting resources as that is the most profitable course of action.

There is no utopia where prices remain the same in a disaster area and supply remains constant. The choices are either A) Prices are capped through anti price "gouging" laws and supply quickly dries up leaving people who are already in a terrible position without the necessities of life, or B) The price is allowed to be set by the market and an adequate supply of all life-sustaining goods and services continue to be available to meet demand. You can either have stable prices or stable supplies, not both.

Related Content:

Minimum Wage, Maximum Stupidity - Nick Coons
Licensing Removes Consumer Choice, Harms Poor - Nick Coons
Global Warming and Government Regulations - Austin Raynor

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Show Date Aug 2, 2015
Topic Secret Science

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