Hurricane Harvey and the Failure of the Free Market
Paul Constant

I see a lot of very free-market comments here, many of which ask with an air of triumph, “Well, if you’re not going to depend on the free market, what else would you do? What’s YOUR amazing solution to stop people dying?” It’s mystifying to me how people can get so conditioned by only ever seeing one idea or one approach that they think there can be no other possibilities.

Emergencies are not normal situations. In a situation like this, actual rationing is about the best way. Everyone needs to drink about the same amount of water, pretty much nobody has access to a clean supply. So you don’t have to figure out different people’s demand preferences and muck around with slopes of this and curves of that. The government just commandeers all the water, pays the stores a flat price that’s comparable to the day-to-day price, and then distributes it to the public, for free, same amount to everyone. Result: Everyone gets to drink water, nobody dies of thirst, nobody gets (and then spreads) dysentery or other waterborne diseases from drinking bad water in desperation. Any tax money used to pay for the water is more than made up for by the lack of tax money spent dealing with the dead and sick, while the public get free water and can reserve their money and mental energy for dealing with other problems, of which they have plenty. With the government stepping in and assuring supply will be equally available, there is also less motivation to attempt hoarding — there is some assurance that a supply will be there.

Even from a fanatic “free market” perspective the pro-price-gouging position is mumbo jumbo. Neoclassical economics says that markets are efficient under certain conditions; one is, customers have access to a near infinite pool of competing firms selling, none of them individually capable of setting or strongly influencing prices. Because of this and various other factors (most of them never real, such as perfect information), prices are supposed to automatically end up near the price of production and indeed firms are supposed to compete to lower the price of production so they can beat the other firms’ prices; that’s what’s supposed to be “efficient” about it.

But if you’re in a disaster area you cannot travel far; if you could you would leave the area entirely. The available sources of bottled water are going to be very few, and the costs of going to look for a cheaper source elsewhere very high. Thus, the sellers form a de facto monopoly or oligopoly — nothing resembling an efficient market. With little price competition, they are able to push the price far above the cost of production, collecting huge “rents” — the one thing the classical economists, such as Adam Smith, saw as the major enemy of efficiency in markets. In short, the disaster “price-gouging” effect is the opposite of free market efficiency even if one believes in the stuff.

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