Price gouging in the Katrina aftermath: free markets at work

Abstract

PurposeThe concept of “price gouging” during times of emergency, such as in the aftermath of Katrina, often evokes quite an emotional and reactive response from people who are outraged that stores and companies would increase their prices during a time of emergency. The problem is that people do not realize that, in times of emergency, the market price they knew before is no longer adequate. Government intervention is not the answer to this “problem.” The purpose of this paper is to explore basic concepts of economics, to glean a better perspective of the justification for raising prices during times of emergency, as well as what would happen if there were not laws preventing this very necessary practice.Design/methodology/approachThe paper addresses some “basic concepts” of economics and applies them to emergency situations, preeminently the dire plight of New Orleans and the Gulf coast after Katrina.FindingsThe paper finds that a government passes legislation preventing price gouging based on the implicit premise that it can allocate resources more efficiently than the market. By doing so, it alleges that it knows what the people want better than entrepreneurs who sink or swim based on their ability to anticipate matters of this sort. The paper voices the view that government regulation is nothing short of a disaster as far as satisfying customers is concerned.Originality/valueThe paper is of value in offering the forthright view that during times of disaster, prices must be allowed to adjust as a signal to producers and consumers alike. Consumers will utilize less of these goods, and producers will increase their output. As the supply adjusts following the price increase, goods and services will get to those who want them the most and are willing to pay for them. The paper posits the view that this will undoubtedly be a more effective way to distribute supplies to hurricane victims – price controls must be repealed, and the free market must be allowed to work via the beneficent invisible hand, not by the stultifying hands of the bureaucrats and politicians.