Consider this scenario. The forecast is for two to three inches of snow. You tell yourself, “This time, I’m not going to join the pre-snowstorm panic lines at the supermarket. Tomorrow is my regularly scheduled weekly shopping day, and I’m not going to change it.” Most of the time, your choice would work out fine. Unfortunately for you, two to three inches of snow turns out to be a foot of snow. Your street hasn’t been plowed, you don’t have a four-wheel drive car, your refrigerator is empty, and you have two hungry children in the house, home from school.
Fortunately for you, although a supermarket is not within walking distance, a 7-Eleven is. You bundle up your children; and together, you walk up to the 7-Eleven. Milk is five dollars a gallon; at your favorite supermarket, it is three dollars a gallon. A pound of ham is $10, instead of six dollars; and it’s not your favorite brand. The only bread you can buy is the soft, white bread, which you can’t stomach.
You find yourself mentally complaining; but then, you stop. A feeling of gratitude comes over you. You remember that you have no food in the house, and you’re glad 7-Eleven is on the corner.
Is it fair that 7-Eleven charges more than your local supermarket? Should they be forced to roll back prices to supermarket prices? A moment of reflection tells you that, if 7-Eleven were forced to charge supermarket prices, they would not have located a store on your street corner in the first place. Further reflection reveals another truth: The fact that the 7-Eleven has milk to sell after the snowstorm is precisely because your neighbor, who has a four-wheel drive car, drove to the supermarket. If 7-Eleven had the same prices, why would he drive to the supermarket? If he had not driven to the supermarket, if instead he bought milk from 7-Eleven, there would be no milk on the shelves for you to buy.
The point is that, one way or another, after a snowstorm, milk is going to be rationed. If you allow the market to work its magic, there will be milk for everybody. If you act on the belief that it is unfair for 7-Eleven to charge more, the consequence is that some people go hungry.
Now, consider those in New Jersey who have been hardest hit by Sandy. Many gas stations are closed because they have run out of fuel, or they have no electricity to operate the pumps. Those stations that are open have cars waiting in lines stretching for miles with drivers waiting for two or three hours for gas. Stations have not raised prices because New Jersey state government officials have threatened to prosecute and levy heavy fines on those who “price gouge:”
New Jersey’s anti-gouging law, which prohibits price hikes of more than 10 percent in an emergency. The law does make an exception for merchants who face increased costs, but the markup is still limited to 10 percent above normal, according to the state attorney general’s office.
“We will not hesitate to impose the strictest penalties on profiteers who, in direct violation of our consumer protection laws, seek to capitalize on the misfortune of others in the midst of a crisis and recovery period,” Gov. Chris Christie said, issuing his second warning in as many days on the issue.
Some journalists have become self-proclaimed vigilantes as they seek to find price gougers to be served up as public examples. One at NBC News wrote: “Have you seen examples of price gouging? Send photos of price tags or receipts to Bill.Briggs@msnbc.com.”
So gasoline is being rationed, but it is being rationed by long lines. Some drivers in those lines are facing genuine emergencies. They may, for example, have to travel to see a family member who is ill in the hospital or in dire need of help. They may need gasoline to run their generator to prevent genuine hardship for an elderly person or a very young family member. Others are in line to simply top off the tank for recreational driving. They may be going stir crazy, and they want to go to the mall.
Suppose “price gouging” was allowed and some stations raised the price of gasoline to $10 a gallon. Those drivers facing genuine emergencies would gladly pay the $10, while those who were simply going to the mall might think twice about their need for gasoline.
At the same time, those gas station owners who are able to earn higher than normal profits by being open will do everything in their power to increase the supply of gasoline available to their customers. They might stay open 24 hours a day in order to reach more customers. They might hire more crews to move the line along since, in New Jersey, consumers are not allowed to pump their own gas.
Gradually, as electricity returns, competition would return to the market; and prices would fall. Meanwhile, at the height of the emergency, allowing prices to rise would result in minimal disruption of supply to consumers.
There are those who will say this is unfair. They will say that the item should go to those who need it the most. Precisely! Allowing prices to rise does just that. Gasoline will be rationed one way or another—either by long lines and shortages or by allowing price to rise so that those who place the highest value on gas can find gas to purchase.
Those attached to the fairness argument might question, “What about the person who can’t afford it?”
The “can’t afford” argument is no different in a crisis than in everyday life. Every day consumers make choices. My family doesn’t subscribe to cable TV; no one in my family owns a smart phone; but, we spend a lot of money on high quality food.
But, some ask, what about those who are genuinely poor? There is more hardship and deprivation in the world than we can imagine. The poor face unimaginable trade-offs every day. The question to ask is not “Is there any system that will eliminate their hardship?” The question to ask is, “Which system will reduce it?” Genuinely free markets driven by entrepreneurial innovation are the greatest engine for reducing poverty.
If I was in New Jersey and facing real deprivation, I would want entrepreneurs to have the motivation to bring me needed supplies. New Jersey bureaucrats have no means to deliver gasoline to those in need of gasoline. Only gas station owners can do that. Let them do their job.