From June 1st to November 3rd, people all along the eastern part of the United States watch vigilantly for any developing storm systems in the Atlantic Ocean. From time to time, a storm brews into a hurricane, and people who are suspected to be affected begin to prepare. They go to stores and purchase essentials like water, bread, and milk. They also rush to the gas station to fill up on gas before it runs out. The hurricane causes panic in the people, and this shifts demand to the right, thus increasing the price of goods. Should we allow prices to increase during natural disasters or should we protect against price gouging? For a while now, there has been debate about high prices during hurricanes. According to the study of economics, when the quantity of a good increases, the demand curve shifts to the right. This causes an increase in price according to the law of demand.
During a hurricane, demand for necessary goods is so high that prices tend to skyrocket to absurd prices. For those who do not understand supply and demand, this appears as price gouging. The Harvard Business Review states that “high prices also mitigate hoarding… customers buy only what they need.” When consumers buy only what they need, it allows others consumers to buy only what they need as well. Also, higher prices incentives firms to create a larger supply and capitalize on the current demand. The downside of this, however, is those who cannot afford to pay such high prices for goods like water and gasoline will be forced to go without them. As stated by the LA Times, although higher prices on essential goods would incentive firms to bring supplies to affected areas, there are times when those places cannot be physically reached. Without additional supply coming in and the demand staying high, the price will exceed what some can afford. The LA Times used an example of a mother who needs to buy water for her children.
She may value the water at its current market price, but if the price is too high and she does not have the money for it, she simply cannot purchase the water. These high market prices hurt consumers who have low income. The LA Times later says the only people who benefit from these high market prices are the firms who have the supply and are able to sell to consumers. Firms are not the only ones who have the potential to make money from a demand increase during hurricanes. The NY Times says during a national emergency, a black market of sorts can arise. Consumers who act quickly can purchase a large quantity of essential goods and then turn around and sell those goods to those in need for an even higher price. If stores do not have any stock left and the black market is the only place with supply, some desperate consumers may have no choice but to buy goods from them. This brings up another key point. If poor individuals and families can hardly afford essential goods at normal prices, these higher market prices which are driven by a low supply and shift in demand cause them to be taken advantage of. If they are not being taken advantage of by firms, other consumers will. Although many see higher prices during a hurricane as unethical and unfair, AEI, a public policy blog, argues there are many advantages to allowing market prices to increase. AEI focuses more on how the higher market prices can help the affected areas recover rather than how higher market prices may hurt consumers temporarily. According to AEI, market-determined prices do not require government action. Government action is slow, and this increases the recovery time for consumers.
When outside firms see the high market prices in the affected area, they will bring supplies there. This shift in supply will decrease the market price and any price gougers out there will be out of business. Also, market prices communicate to the firm what consumers want to buy and what they are willing to pay. Higher market prices more accurately communicate the scarcity of a good than a government-imposed price ceiling. Overall, the best policy is to allow the market prices to fluctuate as supply and demand fluctuates. No policy is best for everyone. When there is a hurricane, there will be a trade-off between equity and efficiency. Some people will only face a small loss while others will face a large loss. In the grand scheme of things, the market will return to normal the quickest whenever the market prices are allowed to fluctuate.