When natural disasters and other emergencies strike, two things are certain. First, many essential goods will run out of stock at stores. Second, economists will complain that if only prices would rise in response to the increase in demand, shortages could be avoided.
Let’s take the current winter storm passing through much of the center of the nation, importantly including the southern US where both individuals and governments are unprepared for major winter storms. Here is a sign up at Home Depot in Arkansas:
I can verify that many people in Arkansas don’t have snow shovels. I’ve seen folks using dust pans and leaf rakes to try and clear their driveway. This video is a few years old, but I have no doubt that someone in Arkansas right now is strapping a widescreen TV box to their lawn tractor to clear snow.
So why no snow shovels in Arkansas at Home Depot? The common answer: it doesn’t snow much here, so the stores don’t stock many, and then when it does snow everyone rushes out to buy them.
Simple enough, but the economist says: WRONG! The reason Home Depot doesn’t have any snow shovels in Arkansas is because they didn’t raise the price. Why do economists insist on this?
First let’s note that in and around Sioux Falls, South Dakota there are plenty of snow shovels. There, Home Depot has 15 different models in stock, including 64 of the True Temper 18 in. Mountain Mover Snow Shovel for the low price of $13.97. It snows all the time in South Dakota, so there is always a lot of demand for shovels, but there is no large increase in demand from any particular storm. Shovels are always on the shelf at $13.97 in South Dakota.
Not so in Arkansas. You can’t find a snow shovel anywhere (they do have regular old dirt shovels though, probably not a bad substitute right now). How does raising the price help people get shovels?
Economists will tell you that raising the price does two things. First, it discourages people from buying shovels, especially those that place a lower value on shovels. Second, it encourages supply to be brought to the local market.
I think the demand side of the equation is the most important one now (with roads closed, it is hard to truck in those South Dakota shovels in the short run). If I happened to be one of the first lucky people to walk into Home Depot right as news of the snow storm was announced, I might see a big stack of snow shovels and decide to grab 3 or 4. Why so many? Well, why not? My wife and kids could help me shovel and we’d clear the driveway even faster than just one of us shoveling. Or maybe I think I could give or sell one to my neighbor. Why not, they are only $14!
But if Home Depot also saw the storm coming (or just witnessed people all of a sudden by 4 snow shovels at a time), they could raise the price. If the shovels are $28, I might decide I only need one. That will leave a few shovels for the next lucky person to walk in, who probably values his first shovel more than I value my fourth shovel. Raise the price high enough, and there might even still be some shovels on the shelf three days into this storm.
Easy enough. So what are the objections? Well, non-economists have plenty.
The most common objection: but that’s price gouging! Well yes, that is the term that people apply to it. And it’s certainly a nasty term: what else do you gouge, other than people’s eyes? But it’s just a term people use.
Actually though, it’s more than a term. Most states, including Arkansas, have laws that prohibit price gouging. During a declared emergency, it is illegal to raise the price of any good that is needed for the emergency by more than 10%. The fine is up to $10,000 per incident. By “per incident,” I assume they mean per shovel in this case. Yikes!
But economists think there are lots of bad laws on the books, and indeed most economists think that these types of laws are a bad idea. No doubt though, these laws are popular with the general public.
Another objection: isn’t it unethical to raise prices during an emergency? Economists reply: we aren’t in the business of ethics. Go ask an ethicist. Economists are here to tell you about consequences. The consequences of these laws are that some people can’t get shovels during a snowstorm, even though they may place a high value on them.
There’s another entity that thinks it’s bad to raise these prices: apparently, Home Depot itself has a policy against raising prices during an emergency. The tagline at the bottom of the Home Depot sign says “lower prices… guaranteed.” That slogan is not specific to emergency situations, but it may as well be. I propose that they change their slogan to “shortages during emergencies… guaranteed.”
The final objection is that if you allow the price to rise during an emergency, only the rich will have shovels. The economist answer to this: maybe, maybe not, but this isn’t much different from non-emergency times. Yes, people with more money are going to have an easier time buying stuff. But if we don’t allow the price to rise, the ones that give shovels are going to be the lucky ones that show up first. The poor generally aren’t that lucky. And anyway, really rich people probably aren’t buying $14 shovels. They are probably paying someone else to clear their driveway.
The bottom line for economists: it’s not at all clear that anti-price gouging laws or store policies get goods into the hands of the poor. They get the goods into the hands of the lucky or the alert, but they certainly don’t get shovels into the hands of those that value them the highest.