In correctly anticipating that there would naturally be upward pressure on prices in New Jersey for many critical goods like fuel, food and electric generators in the wake of Hurricane Sandy because of an increase in demand and a reduction in the supply of many of those goods, Governor Chris Christie then applied some faulty economic reasoning to the situation by declaring that:
During emergencies, New Jerseyans should look out for each other — not seek to take advantage of each other. The State Division of Consumer Affairs will look closely at any and all complaints about alleged price gouging. Anyone found to have violated the law will face significant penalties.
With that statement, the New Jersey governor demonstrated a fundamental lack of understanding about how markets actually work. Sellers always try to take advantage of consumers, in the sense that they always charge “whatever the market will bear,” and this condition of a well-functioning market doesn’t change because of a natural disaster.
Just like earthquakes, hurricanes, or floods don’t change the fundamental physical laws of gravity or aerodynamics, those natural disasters also don’t change the basic laws of supply and demand. If sellers of electric generators in New Jersey are guilty of illegal “price gouging” for charging market prices after a major disruption to the market like Hurricane Sandy, then sellers of all products at all times are guilty of “price gouging.” Sellers always charge “whatever the market will bear,” and in that sense are always trying to “gouge” and “take advantage of” buyers to the maximum extent possible. To act any differently would be foolish and even disruptive to our economic system based on market prices.
I’m very confident that the last time Governor Christie personally sold one of his own homes, shares of stock, or cars, he sold his possessions for the highest price possible and not a penny cheaper, and in the process he did his very best as a seller to “take advantage” of the buyer. That’s how markets function.
Rising, market-based prices following a disaster are the most effective method possible of allocating scarce resources, eliminating shortages, and attracting essential supplies to the areas that need them the most. In fact, market-based prices are also the most effective method possible of allocating scarce resources, eliminating shortages, and attracting essential supplies to the areas that need them the most before a disaster – wind and rain don’t change that reality. Governor Christie and others fail to recognize that the coordinating role of market prices becomes even more important following a disaster, not less important. To prevent the price system from operating following a disaster with price gouging laws will make the situation worse, not better. Thanks to the strict enforcement of their state’s price gouging laws, New Jerseyans should expect possible shortages of fuel, food and generators.
It’s only in the fantasy world of politics that the “anointed elected officials” think they get to be the “price deciders,” and determine if sellers are guilty of “price gouging.” In the real world of the marketplace it’s much different and much more democratic – the impersonal market forces of supply and demand become the “price deciders,” and we’re all much better off with those market-determined prices than with the artificial prices determined by politicians and bureaucrats.