Hurricanes Don’t Blow Away Economic Law

The debate over the morality and efficiency of so-called “price gouging” during natural disasters and other emergencies provides a unique opportunity to explore some of the most fundamental ideas in economics. Understanding those ideas is important not just for the economics of emergencies, but for how market economies operate in more normal times and why they are superior to the alternatives.

The biggest advantage of market economies is the way in which they tie together how we decide who will get to purchase and consume goods with the way in which those goods are supplied. Market prices are not only a good way of determining who should get goods. They also work to encourage people to supply more or less of the good depending on how much in demand those goods are.

If Not Prices, Then What?

To see this, consider the various alternatives there are to allocating goods on the basis of people’s willingness to pay the market price for them. Suppose we have a big pile of stuff on the floor in front of us. How might we determine, other than through selling them at a market price, who will get to acquire those goods?

We could do “first come, first served.” We could have some sort of lottery system by which random people acquire the right to take goods. We could distribute the goods by dividing them equally among the people present. We could also use some sort of merit system, or distribution according to some concept of need. We could also do “might makes right,” and let people fight it out to get stuff.

All of these are at least possible ways that we might determine who gets to consume what. We can also identify advantages and disadvantages to each one.

Distribution by lottery or equality seems more fair in one sense in that it does not take into account people’s ability to pay the market price. However, it’s perhaps unfair in another sense in that it also does not take into account how important the want is that those goods will satisfy. If we were to allocate coats this way, it might not take into account whether someone lives in a colder or warmer climate, or the differences in their typical body temperature or how much they like or dislike being warm or cold. More urgent desires for the good have no way to be expressed and satisfied.