Most economists are against price gouging laws, which make it illegal to raise prices during a natural disaster. The shortages and long gas lines after Hurricane Sandy showed the consequences of these laws. Let’s riff on Eric’s zombie post to give price gouging a fresh look. Eric pointed out that Hurricane Sandy shows how every single zombie movie gets a key point wrong. Quote:
If you watch a zombie movie, the happy end of the world adventurers goes to the walmart and gets some canned tuna fish some rolls of toilet paper and extra magnum rounds. And the store is well stocked.
When the zombie apocalypse comes, the mother of all rat packing will happen, and there won’t be a 7-11 with a piece of gum left on the shelves 15 minutes after the first zombie shows up growling for brains on your lawn.
Very true. Every zombie movie makes this mistake and has the store stocking scene. Here’s a scene from Shaun of the Dead. Note the full shelves.
So the real question is, how do we prevent our zombie fighting adventures deaths due to shortages of canned tuna fish?
Let’s go back to Hurricane Sandy. With Sandy, due to price gouging laws gas prices couldn’t rise, so we replaced allocation by price with allocation by rationing, long lines and the black market. In fact, with Sandy many gas stations had gas sitting in the ground but wouldn’t sell it because without electricity they’d have to pay extra for an electrical generator to pump it. But if we repeal gouging laws, what happens? Well, let’s assume prices spike to $20 a gallon. Then gas stations pay for a generator to pump it out since they can recoup the cost. Without any policing, the high cost also greatly discourages people from hoarding or topping off their tanks. Finally the short term rise in prices makes gas supplies from elsewhere flow into the area. This is Econ 101, supply and demand. When prices are allowed to rise, we can use the price mechanism in an emergency when we most desperately need it.
So why is it illegal? People hate it due to a visceral dislike of windfall profits. Especially during an emergency. Sharing in a crisis is a deeply moral human instinct critical for families and small groups. The irony is this admirable moral repulsion against hoarding fails at scale in a modern economy. Sure it’s bad that some people profit, but the gas shortages were far worse. So much unnecessary suffering. This is a very old insight, and if you want to hear how old I especially liked a recent Econtalk podcast that talked about Sandy using work from John Locke from 1660, that’s 350 years ago. Locke used a wheat famine as his example instead of a storm. What’s interesting is Locke lived before modern economics had been invented. So as a moral philosopher he is concerned with the proper moral stance to shortages. Here’s Mike Munger talking about Locke on the podcast:
So he says it only requires that we should sell to all buyers at the market rate, “for if it be unjust to sell it to a poor man at 10 shillings per bushel, it’s also unjust to sell it to the rich for 10 shillings. For justice has but one measure for all men.” Now, he may be wrong about that. But that’s his claim. The market price means that I will sell it to anyone at that price. I don’t look at them, I don’t look at their particular condition. So, if I see someone starving and I raise my price for wheat, that would be wrong. Maybe I could get away with it. Maybe the market would bear it. I see this guy; he’s not going to be able to walk another hundred yards to the next wheat seller, and so I jack up my price; he has to eat it or he’ll starve. That would be wrong. But it’s fine for me to sell it at the market price so long as I would sell it to anyone. And there’s that kind of anonymity, the modern thing that you mentioned–the anonymity of the buyer. This buyer is standing in for any other buyer. I’m standing in for any other seller. We have many buyers; many sellers; that’s what makes up the market price. This is an extremely sophisticated view of economics.
The moral angle is important and often lacking in our modern economic discussion. For example here’s an excellent modern economic and non-zombie take on the evils of price gouging laws from Matthew Yglesias.
Back to zombies. If the zombie apocalypse starts, and we let people charge crazy prices, we won’t have shortages. Prices will jump. At first of course not everyone will believe in the zombies. Maybe they think the zombies won’t invade beyond New Jersey, or maybe they think their best friend (now zombiefied) can’t have turned so bad so quickly. Those people hold off on getting their cans of tuna because it’s now $10 a can. But our heroes figure it out immediately and spend their life savings on tuna, toilet paper and some very sharp gardening tools. And so they survive. What’s great is we can keep the classic store stocking scenes in our zombie movies. We just need a quick flash showing prices have spiked, and maybe show the shelves as half-full, not completely full.
Bottom line: repeal price gouging laws now, before the zombie apocalypse, or we’re all doomed.