On Price Gouging During a Disaster

Gouging quite literally saves lives. We should fight our natural tendency to think it’s unfair…

It’s become fairly standard practice… In the aftermath of any disaster (or even during), a local official is provided a public bully pulpit to lecture us on the evils of price gouging. Naturally, it garners attention, retweets, and consensus.

Here’s one example from today’s news cycle, as Hurricane Irma bears down on the West Indies, and sets her sights on the Floridian peninsula:

And it makes sense, of course. We all desire to be benevolent and understanding. As we sit in our dry, warm houses thinking of those whose lives may have just been torn apart by a hurricane or some other uncontrollable force, the idea of price gouging (even the name itself) implies an uncomfortable misbalance of power, where some poor needy person is denied something they absolutely require purely driven by a motive that is both nefarious and greedy.

And there’s logic for Attorney General Pam Bondi, for instance, to appeal to potential gougers to threaten them with legal action and public shaming. After all, her two biggest focusses, in no particular order, should be upholding the law, and minimizing death and injury (not to mention looting) as a result of the impending storm.

But, there is a massive problem with this logic. Price gouging is a natural outgrowth of supply and demand. It follows the old intrinsic rule that prices will increase as long as the demand is present. It’s one of those cosmic injustices that cannot be addressed without a chain reaction that creates way more of an undesirable result.

I’m going to take an example from my own life. In 2012, Hurricane Sandy smashed into the New York City area. I was living in lower Manhattan at the time, just a few hundred feet from the mandatory evacuation zone. I felt lucky that I didn’t have to leave. I went to bed to the sounds of a whistle as the winds barged through the cracks in my old, rotting wood window frames. I woke up the next day without power. It was a fun novelty for a while. But as nightfall set in, my apartment was dark and cold. I went looking to buy a flash light. I had to walk nearly 30 minutes north to finally find a market that had one. This little dumpy bodega was charging $65 for a tiny plastic piece of garbage.

I immediately pushed back, annoyed about it. The guy at the counter told me it was their last one, and if I didn’t want it, someone else would. Literally, as I was standing there trying to work my passive-aggressive bargaining power, another guy walked in and, as the clerk held the flashlight up saying that he’d sell it to me for $60, the new guy said “I’ll give you $70!” I didn’t contest, and I walked out without a flashlight. A couple blocks further up, I miraculously found another flashlight for sale… $75. I bought it without hesitation.

Though I am not rich, I’m not poor. The marginal utility of that flashlight was way higher to me than $75, particularly considering I had no idea how long this power outage would last. Naturally, it’s easy to consider how many people couldn’t afford to pay $75 for an essentially disposable simple necessity. But what I read about the next day, coincidentally and interestingly, was that there were all sorts of smart and industrious merchants from other areas not affected by the hurricane working double-time to get flashlights, batteries, and other commodities into the city to sell to the demand-heavy, supply-strapped market. Within days, prices dropped to significantly more reasonable levels.

Now, let’s imagine that those little bodegas were following the law here, and they were honoring the $5-$10 price tag that the item generally carries. Here are a few things that would likely result:

  • Those bodega owners may not be willing to open their store. Without electricity, and with no public transportation, would it be worth it to come in and make their standard margins on cheap items? Then, nobody gets flashlights.
  • Those entrepreneurs that I mentioned wouldn’t have an incentive to leave their lives, potentially risk their safety, and drive across large swaths of the country toget products in the hands of those in need.
  • With fewer stores to buy the limited number of available flashlights from, and with no realistic hope of a replenishment, those who couldn’t afford the ~$70 price were out of luck, and out of options to legally obtain a flashlight. That means that either people don’t get to have a flashlight (the very thing that people like Pam Bondi was trying to avoid to begin with), or people see an opportunity for theft and/or looting in the context of a police presence that is spread thin.

Intervention in the natural laws of supply and demand drives shortage. This is why it’s important to see the proverbial forest through the trees, and don’t build an emotional consensus without educating ourselves on the reality of these horrific situations. Wishing that everyone was able to obtain things for a fair price is great in theory, but unrealistic in practice. Cosmic injustice can’t be solved for, and trying to cure the world of it will make the very thing you are trying to address more of an issue.

Price gouging is a good thing. It drives supply, and lowers prices in the medium and long term.