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In Harvey’s path, an avoidable man-made disaster – Publications – AEI

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AEI In Harvey’s path, an avoidable man-made disaster Here’s a slightly edited version of this Wall Street Journal op-ed by Clemson University economist David Laband: In the wake of the devastation wrought by Hurricane Harvey, stories of a different sort of “hardship” have appeared. For days now, tens of thousands of people have been without power. Food, fresh water, gasoline and other commodities are in short supply. Not surprisingly – to economists at least — prices of certain commodities rose to alleviate the imbalance between individuals’ desires and local availability. Bags of ice that normally sold for were being sold for . A post-hurricane chain saw was in the 0 range, plywood was available at 0 a sheet. To many, price gouging is unconscionable, especially when someone

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In Harvey’s path, an avoidable man-made disaster

In Harvey’s path, an avoidable man-made disaster - Publications – AEI

Here’s a slightly edited version of this Wall Street Journal op-ed by Clemson University economist David Laband:

In the wake of the devastation wrought by Hurricane Harvey, stories of a different sort of “hardship” have appeared.

For days now, tens of thousands of people have been without power. Food, fresh water, gasoline and other commodities are in short supply. Not surprisingly – to economists at least — prices of certain commodities rose to alleviate the imbalance between individuals’ desires and local availability. Bags of ice that normally sold for $1 were being sold for $10. A post-hurricane chain saw was in the $600 range, plywood was available at $200 a sheet.

To many, price gouging is unconscionable, especially when someone else profits at your expense. Indeed, emergency legislation was passed making the charging of higher prices post-Harvey than pre-Harvey a crime, punishable by a fine of up to $2,000 and/or a 30-day jail term. Give the politicians credit for being politically astute. Give them all an F in economics.

Government-mandated restrictions on price levels will slow the cleanup effort as much as another Harvey. High prices are the free market’s mechanism for ensuring that economic resources flow to their most highly valued uses.

On the demand side, high prices guarantee that scarce goods are allocated to those buyers who place the highest value on them. On the supply side, high prices motivate producers to increase production. At $200 per sheet of plywood, $10 per bag of ice and $600 per chain saw, contractors nationwide will rent planes to ship plywood, ice and chain saws to Houston. At artificially low, restricted prices, no one will bother and demand will continue to exceed supply.

So why are price controls embraced so fervently by the public? Almost certainly it is because every individual has an incentive to alter the distribution of income in his favor and most individuals have a distorted understanding of prices.

But for fast, efficient reaction to problems caused by natural disaster, the price system can’t be beat.

MP: Actually that WSJ article appeared almost 28 years ago on September 27, 1989, and was about Hurricane Hugo, which struck South Carolina, and led to anti-price-gouging laws in Charleston. Here’s further information about the distortions caused by the emergency anti-price-gouging in Charleston in 1989, from the 10th edition of Economics: Private and Public Choice by James Gwartney et al.

The emergency price ceilings kept prices down, but also stopped the flow of goods into the area almost immediately. Shippers of items such as ice would stop and sell their goods outside the harder-hit Charleston area in order to avoid the city’s price controls. Shipments that made it into Charleston and sold at pre-Hugo prices were often greeted by long lines of consumers, many of whom would end up without goods after waiting in line for up to five hours. Some of the lucky people who got those items would then drive them back out of the city to sell them at higher, noncontrolled prices.

The price controls resulted in serious misallocations of resources. Grocery stores could not open because of the lack of electric power; inside the stores, food items were spoiling — thousands of dollars’ worth in some stores. Gasoline pumps require electricity to operate, so, although there was fuel in the underground tanks there was a shortage of gasoline because of the inability to pump it. Consumers were faced with problems of obtaining money, as ATM machines and banks could not operate without electric power. Hardware stores that sold gasoline-powered electric generators before the hurricane typically had only a few in stock, but suddenly hundreds of businesses and residents wanted to buy them. In the absence of price controls, these generators would have risen to thousands of dollars in price. Individual homeowners would have been outbid by businesses who could have put the generators to use in opening stores and gasoline stations and operating ATM machines. It would have been these uses that could have generated enough revenue to cover the high price of the generators. Individuals who had generators at home would have even found it in their interest to sell them to businesses for the high sum of money involved.

However the price ceilings prevented prices from allocating these generators to those most willing to pay. Instead, individuals kept their generators, and it was commonplace for hardware store owners who had a few generators on hand to take one home for their family, and then sell the others for their close friends, neighbors, and relatives. In the absence of rationing by price, these non-price factors played a larger role in the allocation progress process. While these families used the generators for household uses (such as running TV sets, lighting, electric razors and hairdryers), gasoline stations, grocery stores, and banks were closed because of their inability to purchase generators. Thousands of consumers could not get goods they urgently needed because these businesses were closed. In addition, the flow of new generators into the city effectively ceased and some were being taken from the city to the less-damaged outlying areas to be sold at higher, non-controlled prices. Without price controls the price of generators would have been bid up to the point where they would be: 1) purchased by those who had the most urgent uses for them, and 2) imported into the city fairly rapidly because of the high prices they commanded.

The impact of the controls imposed subsequent to Hugo highlights the importance of both price signals and voluntary exchange. Even when major reallocations of goods and resources are needed, such as during a natural disaster, pricing signals will help motivate people to undertake actions that will minimize the damage. The secondary impacts of the price controls imposed in the Charleston area magnified the suffering and retarded the recovery.

Bottom Line: Here we are more than a quarter-century after Hurricane Hugo, and things haven’t changed much. The general public still hasn’t learned the economics lessons explained so clearly by economist David Laband in 1989. Just like in 1989 following Hugo, the anti-price-gouging laws in Texas and Florida today will magnify the suffering and retard the recovery. And just like 28 years ago, the Texas politicians and bureaucrats today including Texas Attorney General Ken Paxton get an A for doing what is politically expedient but they all get an F in Economics 101.

In Harvey’s path, an avoidable man-made disaster
Mark Perry

Mark Perry
Mark J. Perry is concurrently a scholar at AEI and a professor of economics and finance at the University of Michigan’s Flint campus. He is best known as the creator and editor of the popular economics blog Carpe Diem. At AEI, Perry writes about economic and financial issues for American.com and the AEIdeas blog.

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