Bad Economics and Hurricane Harvey

Disasters seem just about the worst possible time to discuss economic concepts. Ask Forbes columnist Tim Worstall, whose column on “price gouging” in the aftermath of Hurricane Harvey has purportedly been removed from their site.

At times of human suffering, a host of people apparently consider it crude to discuss the best response, if that response incorporates the functioning of a market economy. Yet for those of us who worry about outcomes rather than platitudes, it is incumbent to denounce bad ideas, and seek to propose better ones. Natural disasters such as Hurricane Harvey reap enough destruction, emotional and physical, without compounding it with policies that make things worse.

CNBC reported yesterday that Texas Attorney General Ken Paxton has said 500 complaints about so-called “price gouging” have been made following the storm:

That includes reports of up to $99 for a case of water, hotels that are tripling or quadrupling their prices and fuel going for $4 to $10 a gallon.

Such price increases in emergency situations can lead to significant fines under current Texas law. The traditional justification is that raising prices in emergencies reflects greedy profiteering. Indeed, in reaction to natural disasters and terrorist attacks worldwide it is common for companies to be denounced for heartlessness (here’s something I wrote about criticism of Uber after the Manhattan bomb attack).

The real question we should be concerned with though is surely not moralizing, but whether “price gouging” laws improve outcomes and responses or worsen the situation?

Natural disasters such as hurricanes often lead to shortages of certain products, many of which might be considered essential. Fresh water might be the obvious example. If water supplies get cut off, the demand for bottled water will surge, and if there is uncertainty about how long until those supplies will be back online, some consumers may seek to stockpile. The knockout of…

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