Friday, September 19, 2008

Houston Needs Price Gouging

In the wee hours of Saturday, September 13th, Hurricane Ike came ashore in Galveston County, Texas, where I live. With my family safely housed with relatives on the far northwest side of Houston, I traveled Saturday afternoon to view the damage to my home situated several miles from the coast. I faced little traffic on the highways, few downed power lines, and had little problem getting to where I was going. Now, six days later delivery trucks don’t seem to be able to make it here. Houston’s mayor is still pleading companies to make deliveries of gas, food, and ice, as we sit in long lines for necessities and common comforts. How do we fix this problem? Legalize price gouging.

What was noticeable for a number of days after the storm was gasoline hoarding. Queues for gasoline extended multiple blocks and required several hours of patience. The overwhelming majority of customers not only completely filled the tanks within their vehicles, but they also filled one or more gasoline canisters. No one wanted to wait through another line, so the incentive from price controls was to purchase as much as possible to avoid the need to come back. Because of this incentive, the few gas stations that were open inevitably ran out of fuel, feeding a vicious cycle of panic and hoarding.

If gasoline prices had been allowed to float up to, say, $8, some people, including tightwads like me, would have chosen not to buy as much gasoline in hopes that the price would come down over the next few days. If the average customer was buying only 10 gallons of gasoline instead of 25, the stations would have been able to service more people because the incentives would be to self-ration and not as much to hoard.

The unseen benefits that $8 gasoline would have brought are alternative purchasing options. With enormous profit margins to be made, tanker trucks from the four corners of America would have set off to sell gasoline on the roadside, in parking lots, or door to door, quickly ending the shortage. Instead of getting on the phone and begging for supplies, the mayor could have concentrated on traditional city functions like restoring water, clearing roads and removing debris.

Now, the greatest shortage is electricity. While few incentives could encourage the power companies to work faster, nor for safety reasons should they, there are alternatives that price gouging could provide. The tens of thousands of people who own generators, but have now had their electricity restored, have likely tucked them back into the corner of the garage. If the price was allowed to double or triple, they would be placed in a much more helpful position of being able to pocket some cash now and buy another generator when the prices return to normal in the coming months. As it is, few individuals have an economic incentive to part with their generators and give them over to the hundreds of thousands facing weeks without electricity. Because price gouging is illegal, thousands of people are burning up precious gasoline hoping to hit the Home Depot lottery by being there when the next shipment of five generators arrives tomorrow.

The emotional pull for an egalitarian distribution of food seems to be even stronger than that for gasoline, but the same problems persisted in local supermarkets after the storm. As I picked up a few items at a recently opened store near my home, I witnessed food hoarding going on as well. A woman added nearly a dozen packages of hot dogs to her cart already half-full with bags of frozen chicken breasts, and other packaged meats. She then turned to advise the other two women she was with to grab some. Each added half a dozen packages to their carts. I don’t know their situation back home, but since the shelves were mostly bare already, it probably meant that other people arriving later would have to go without. If the store had hiked the prices of certain items even a few dollars, food types in short supply could have been enjoyed by more people not just the lucky few who discovered that the store had recently restocked.

It is hard to label a system that bans price gouging egalitarian when the winners are those who get lucky or simply have a high tolerance for waiting in line. We need to legalize price gouging. As I wait for my roof to be fixed and tree limbs to be hauled off, I am eating no hot dogs. Can someone tell FEMA to send more hot dogs?


Ad Hoc Committee for Property Rights said...

Your comments are dead on. Prices are the method by which resources are allocated to those who value them most highly. Allowing prices to rise (even to "crazy" heights) reduces the demand and eliminates/ reduces hoarding. It's "funny" that I've heard all kinds of stories warning about gouging, but none regarding hoarding.

edgeofblade said...

I totally agree. People need to let the free market do what it does best: self-regulate. Calling it negatively-connotated "gouging" is just a response from the american consumer who expects to get a deal or a sale on everything, no matter the case. It has lead to a country full of "spendy-tightwads", willing to spend $.99 on a grade-D beef cheeseburger or throw a hissy-fit when a company appears to make a profit.

Obsession over price is dragging down quality (no one in their right mind would demand a $.99 anything if it's going in their body), and where that quality is standardized (gas), demand-rational price fluctuations suddenly become price gouging.

Higer demand? Higher prices, dammit.