Published on January 17, 2025 2:10 PM GMT
In the aftermath of a disaster, there is usually a large shift in whatpeople need, what is available, or both. For example, people normallydon't use very much ice, but after a hurricane or other disaster thatknocks out power, suddenly (a) lots of people want ice and (b) iceproduction is more difficult. Since people really don't want theirfood going bad, and they're willing to pay a lot to avoid that, In aworld of pure economics, sellers would raise prices.
This can have serious benefits:
Increased supply: at higher prices it's worth runningproduction facilities at higher output. It's even worth planning,through investments in storage or production capacity, so you can sella lot at high prices in the aftermath of future disasters.
Reallocated supply: it's expensive to transport ice, butat higher prices it makes sense to bring it in from much farther awaythan would normally make sense.
Reduced demand: at higher prices people who would normally buyice for less important things (ex: drink chilling) will pass.
Reallocated demand: if you have a chest freezer full of food,you get more benefit from a given quantity of ice than I would with amostly empty fridge. All else equal, you are willing to pay more forice than I am.
On the other hand, raising prices in response to a disaster is widelyseen as unfair:
Allocation by price is never great for people who have lessmoney, but a disaster makes this existing inequality more painful.
Store owners are on average richer than customers, so profitshere are moving wealth from poorer people to richer ones.
Normally prices are kept in check by people shopping around,either by observing prices in a range of places or by talking withfriends. These are both disrupted in disasters, which would likelyallow sellers to charge more.
So raising prices in emergencies is generally strongly sociallydiscouraged and often also illegal. Stores quickly sell out, there'sno increase in supply, and allocation is relatively arbitrary.
Is there a way to get the benefits of keeping prices responsive, whilemitigatingsome of the unfairness?
Consider the introduction of congestionpricing in NYC. Charging money to keep people from overusing a commonresource is a traditional economics solution, reducing trafficjams and allowing streets to move more people in less time. Whilethis even helps people who can no longer (or never could) afford todrive, by speedingup buses, it is still often considered too unfair to implement.The NYC approach, however, of charging drivers but then using themoney to fund public transit, resolves enough of the unfairness to beput into practice.
What could something similar look like for disasters?
Sellers can, as in normal times, choose what prices to offertheir goods and services at.
Price increases beyond documentedincreases in the cost of doing business are taxed at some highrate. Something in the range of 65%: high enough that most of theprofits are going to the public, but where it's still worth sellersputting in serious effort to increase supply.
This tax money goes to help people affected by the emergency.
While this still has some of the downsides of existing price gouginglaws [1] I think it's quite a bit better than the status quo.
The biggest advantage is that if the government disagrees with youabout how much of your price increase is due to increased costs, itcan be sorted out later. There are famous cases where someonetried to increase supply in a disaster by doing something unusual (ex:renting trucks to drive generatorsor icehundreds of miles into hurricane-affected areas) and then wereprevented from selling. Much better to have a system where we allagree they're good to go ahead and sell, and tax disagreements can beworked out afterwards. It still doesn't fully remove the risk thatthe government will disagree with you and make your efforts not worthyour while, but at least you're arguing with a judge in a courtroomwhere you can present evidence, and not a cop in front of a mob.
It also:
Gets us some of the benefits of flexible prices, at leastto the extent that sellers believe they'll be able to convince a judgeabout their increased costs.
Helps shift culture in a direction of accepting and expectingprices to change based on conditions.
Transfers money from rich people(who pay inflated prices) to poor people (who receive disasterrelief).
Would people be more ok with responsive prices in emergencies if themoney were primarily going to disaster relief?
[1] I've previously written about discouraginginvestments, but another issue is not handling cases where peoplemight be convinced to sell something they wouldn't normally. For thelatter, imagine an empty nester couple living in a 3BR in LA. Theyprefer to have the house to themselves, but for $5k/month would bewilling to rent out their guest room. In normal times no one wouldpay $5k, so they don't bother putting it on AirBnB. With theemergency, however, there might now be people willing to pay thismuch. There's no way for the owners to demonstrate increased costs,though, so it would probably be illegal for them to list it for $5kboth under current laws and with my proposed change above.
Similarly, say I have a bunch of $150 air purifiers because I'mespecially concerned about infectiousaerosols, and then with a nearby wildfire stores all sell out. Bydefault I would keep them and enjoy my clean air, but I'd be willingto sell a few for $300 each. That would benefit both me and thebuyers, but same issue.
Discuss
