Wednesday, December 2, 2009

The Hurricane and the Ice Sellers

If you haven't already started listening, Russ Roberts has an excellent podcast called Econtalk. It features guests who discuss issues related to economics and policy from a variety of viewpoints.

In one podcast Russ and Mike Munger discuss price gouging, and illustrate the subject with a true story.

When Hurricane Fran came aground in the Carolinas more than 10 years ago, power and other services were knocked out in Raleigh, and transportation through the city was halted by fallen trees. The damage was so widespread that it was simply impossible to restore services to all residents of the city in the first few days after the storm.

A couple of entrepreneurial young men who lived outside the affected area realized that without power in the city, many people would be in need of ice. So they decided to take the day off work, rent a truck and some chain saws, loaded the truck full of ice and headed for Raleigh intent on cutting their way through the fallen trees until they reached the city center where the ice would command the highest price. The morning that they headed into Raleigh, emergency services still had not reached many residents of the city. The National Guard, the Red Cross, and others simply were not yet present.

It took several hours, but the men were able to clear a path into the city and when they found what seemed to them to be a likely spot, they started selling bags of ice at an elevated price. Many customers lined up.

But they weren't all happy customers, and someone called the police. Price gouging is illegal. The people who had been waiting in line to buy ice clapped as the men were handcuffed and taken to jail. Maybe they clapped because they assumed they would now be able to have access to the truck full of ice for free, but the truck and the ice were impounded, and the ice melted away uselessly.

Remember, this is happening in a city bereft of electricity. At the same time that these ice sellers are being arrested, local officials are making an impassioned plea to the federal government to PLEASE SEND ICE, as much as possible as SOON as possible.

Nobody wants to be taken advantage of, especially not in an emergency. That's why there are laws against price gouging. But do these laws make any sense?

Consider: During an emergency, valuable commodities are in short supply in the affected area. However, these same commodities are still available outside that area. What is needed is for people to transport the needed goods from the areas where they are plentiful to the area where people are suffering. We could rely on the good natures of our neighbors to do this for us, or we could rely on the government. OR we could rely on the profit motive, and this just might marshal more resources, more quickly than will the other options. Who made it to downtown Raleigh that day with a truck full of ice?

Don't forget, there are real costs associated with providing a good or service during an emergency. Maybe I care about the people who are stranded without services, but I can't just leave work and spend my own money on a truck, chainsaws, and ice. I've got responsibilities at home that may trump my desire to help.

And what IS price gouging anyway? Who can say what a fair price is for ice in a city without electricity? it cost something to get the ice there, so the price of the ice must be something higher than what it would normally be. The high price is what motivates someone to rent a truck and chainsaws and take the day off work. If enough people do that, the price of ice in Raleigh will come down because the supply will go up!

Isn't that the desired outcome?


  1. Very nice. I voted for Munger for governor, just so you know. :-)

    Completely agree with the idea that "price gouging" in a situation like this should not be illegal. It is an uncontroversial issue to me, but I know a lot of people see it differently. To me, people's negative reactions to such things are failures to understand basic supply and demand.

  2. Perhaps my opinion of "price gouging" is situational, but I believe in this case there was no reason to jail these men -- no one was forced to buy the ice. It was a temporary scenario, and the men were offering goods that no one else was willing or prepared to offer. If I'm on a mountain top and a man offers to sell me a half liter of bottled water for $20, I can pay if I really want the water, knowing that I could buy a similar quantity (in bulk) for about 13 cents at various retail establishments. However, the stores that offer cheap water are not convenient to my hike. I might be able to acquire water free from the mountain, but the potability is dubious. If I'm willing to pay $20 for the water, why not? For sake of comparison, how about the cost of water at an airport? I could pay up to $7 for a similar quantity of water. Is that price gouging? It certainly appears to be legal.

  3. Justin,

    To me this is completely noncontroversial as well, but every time I've tried to explain the idea to an acquaintance of good intelligence but low experience with economic reasoning, I've gotten into an argument. It's hard to, because I know they have nothing but the best intentions.

  4. Thanielson,

    I'm with you completely. The interesting thing about a lot of price gouging laws is that they establish an arbitrary limit for what you can charge for an item during an emergency, above what it would cost during normal times. Apart from the lack of definition on some of those terms, how can anyone know ahead of time what a fair price for an item is during an emergency? How can anyone know that 10% more than 'usual' is fair, but 15% more is unscrupulously taking advantage of people in need?

    And even if I conceded (which I won't) that some percentage of price hike is clearly unfair, I'd still argue that the best thing to do is to let the price go as high as it can in order to MOTIVATE people to bring more of that good or service into the affected area.

    Your example of a high price for water on top of a mountain is an excellent one, because it illustrates both 1) the value of the water to the buyer, and 2) the costs to the seller of supplying the water in an inhospitable and inconvenient location. If I really believe that the price of water on top of the mountain is too high, I should be investing in companies that supply water to the tops of mountains, or hiring people to carry water up mountains and sell it.

  5. Thanielson,

    I'm with you completely. Even if I was willing to concede (which I'm not) that it's possible to create a fair, across the board limit on price differentials by time, place, or situation (e.g. during disasters) , I'd still argue that the right thing to do is to the let price go up in order to MOTIVATE people to bring more of the scarce good or service into the affected area.

    I think your example of the price of water on top of a mountain is a good one because it illustrates both 1) the value to the buyer and 2) the cost to the seller of supplying water in an inhospitable and inconvenient location. If I really believe that the price of water on top of the mountain is too high, then I should be investing in companies that supply water to mountain tops, or hiring people to carry water up mountains and sell it at the top.