Monday, February 08, 2010


After Katrina hit the south, there was a lot of outrage against grocery stores for kicking people when they were down. During the disaster, many stores, gas stations, and hotels took advantage of the situation by jacking up their prices, making a bad situation worse for people who needed food, gas, and lodging. Luckily, many states have laws against price-gouging, so we can have more situations like this, which took place on the east coast during blizzards there last week:
Because prices are kept artificially low during an emergency, people who get there first can go to town and buy as much as they want. Obviously, because these people are nervous, they will buy way more than they need, leaving nothing for people who arrive late. Allowing stores to raise prices during times of extremely high demand ensures that people will not buy way more than they need. Sure, many people will have to pay more than they normally would, but at least they will still be able to buy what they need. And if they don't really need something and don't want to pay the higher prices, shoppers will leave things on the shelves for others who want them more.

Allowing stores to raise prices during times like these not only give them a higher profit, but it prevents future disasters from being as bad. If a store can make a fortune during a disaster, then the owners will recognize this and stock up a lot more when major storms look likely in the future. This means that even more people will be able to get what they need. When there is no incentive for stores to plan ahead and stock up more, they won't, and there will be huge shortages.


Chick in the Czech said...

This is an interesting point and a good example of how the Coase Theorem would work. I guess the main concern would be that practically some people would have a hard time affording items that are gouged when they need them.

I am supposing that you could counter with two arguments:
1. If people couldn't afford the gouging, they could stock up on supplies and be prepared
2. This is the role of food banks

I agree with number 1, and not necessarily number 2 because the food banks would in turn have to pay more for their food unless it were actually donated.

Mom said...

I don't know about this idea. You have a legitimate point, but doesn't it sound pretty mean?!
I think Mormons are always supposed to be prepared for disasters, which seems sensible.

David said...

Regarding your second point, I don't know a ton about the ins and outs of food banks, but my thought is that a lot of their food (or the money for it) comes from donations. If this is the case, donations would probably still take place during disasters; in fact, it would probably increase: look at all the donations going to Haiti.

The whole point is that it does sound mean, but it actually hurts less people if one uses logic to overcome emotion!

Also, the equilibrium price of things would probably not be so absurdly high that only the wealthiest could afford food. If that happened, stores would go out of business after the disaster. Think of The Long Winter when the store owner tried to sell the grain for $3 a pound or some such, and the townsfolk threatened to run him out of business when the spring came.