Monday, October 15, 2018

Why Price Gouging Can Be A Good Thing

In the wake of storms like Hurricane Michael, there are often stories of people who flock into the area carrying loads of supplies such as food, clothes, bleach, generators, fuel and batteries. Often these people are on missions of charity, but others are entrepreneurs who truck in provisions to make a quick buck. Although these profiteers are easy targets for scorn, they do serve a useful purpose for the storm-ravaged communities.

When Hurricane Harvey hit Houston last year, I lived in a small town on the outskirts of the city. While my house was spared serious storm and flood damage, many others in my community were not so lucky. Flooding was extensive and many homes were damaged or destroyed. Even for those who didn’t lose their homes, there were widespread power outages as well as shortages of gasoline and other supplies. When nearly every road is closed, it can be difficult or impossible for stores to get new stocks of food and fuel.

In the wake of the 2016 storm, my family and I volunteered at a FEMA shelter operated by several local churches. We received some supplies from FEMA and the Red Cross, but the majority of the relief items that we received were from individuals and groups around the country. In particular, churches provided truckload after truckload of food and clothes for our local storm victims.

The way the shelter operated was that we would take relief supplies in through the back door and give them away through the front. Donations were unloaded and sorted into categories. We would then use the items to make up donation boxes that were given away. At our shelter, we gave away most supplies to anyone who wanted them, no questions asked.

While this was altruistic and a service to the community, it also made abuse easy. Many locals brought donations to the shelter, but we also noticed some people who would show up every day to pick up food and other items. In some cases, we suspected that they were “shopping” rather than picking up what they needed to survive.

The problem was that when items are given away free, it creates an abnormally high demand. People who might not really need the food would be tempted to get some just because it was free for the taking.

This problem is illustrated by the need for bleach after the hurricane-related floods. In a hot, humid climate like Houston, mold grows quickly. If you have a house that is wet from floodwaters, you need bleach to kill mold in the wet areas before it spreads to other parts of the house. Bleach was in high demand after Harvey.

When shipments of bleach arrived at the shelter, they went quickly. We limited the distribution of bleach, as well as other hard to find items like tarps, to one per family, but there is the possibility that some of these items went to people who didn’t really need them. While charging storm victims for bleach would have seemed cruel, it would also have helped to ensure that the supplies went to the people who needed them most.

In the aftermath of Hurricane Michael, Duracell and other companies have joined relief organizations in shipping truckloads of supplies into affected regions, but with hundreds of thousands of people in storm-damaged areas, how can they make sure that the supplies get to the people who need them? When Duracell gives away batteries, they might well be handing them out to people who have a stockpile of batteries at home. Some might have generators or still have electric service at their home.

There is definitely a place for charity, but there is also a place for the entrepreneurs that people call price gougers. If storm victims can’t find bleach or batteries at a shelter or if the local stores are out of generators, they might be able to get these items from the entrepreneurs who drive in motivated by profits.

Supply and demand are elastic in the wake of a natural disaster. The demand for generators and batteries increases dramatically when the power goes out, especially when it may be out for weeks as one of my friends in Florida expects. If the price doesn’t go up, people will stock up on supplies on the chance that they may need them. In a post-hurricane situation, who knows when the supplies will be available again?

The flip side is that if the price is bid up, buyers who don’t really need the items won’t buy them. If a pack of batteries that generally costs $5 is selling for $20 after a storm, speculators will exit the market and only people that really need batteries will purchase them. There is also an incentive not to waste batteries if you just paid $20 for them.

Natural disasters introduce scarcity and the way that markets deal with scarcity is to adjust prices. Allowing prices to rise after storms seems cruel and selfish, but it helps to ensure that the people who really need supplies are the ones who get them. When prices are not allowed to adjust, shortages often result. Low prices are worthless if there are no products to buy.

God bless the people and the companies like Duracell that are helping hurricane victims, but we should also be thankful for the price gougers. They serve an important role in distributing relief items, but they had better have a thick skin.

Originally published on The Resurgent

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