Subject: In Hugo's Path, a Man-Made Disaster 
Date: Published: 9/27/89 (110 lines)
Source: Wall Street Journal. Copyright Dow Jones & Co. Inc. 
 
 In Hugo's Path, a Man-Made Disaster
 ----
 By David N. Laband
 
 In the wake of the devastation wrought by Hurricane Hugo
 in Charleston, stories of a different sort of "hardship" have
 appeared.
 
 For days now, tens of thousands of people have been
 without power. Food, fresh water, gasoline and other
 commodities are in short supply. Not surprisingly -- to
 economists at least -- prices of certain commodities rose to
 alleviate the imbalance between individuals' desires and
 local availability. Bags of ice that normally sold for $1
 were being sold for $10. A post-hurricane chain saw was in
 the $600 range, plywood was available at $200 a sheet.
 
 To many, price gouging is unconscionable, especially when
 someone else profits at your expense. Indeed, on Saturday
 (two days after Hugo hit), emergency legislation was passed
 making the charging of higher prices post-Hugo than pre-Hugo
 a crime, punishable by a fine of up to $200 and/or a 30-day
 jail term. Give the politicians credit for being politically
 astute. Give them all an F in economics.
 
 Government-mandated restrictions on price levels will slow
 the cleanup effort as much as another Hugo. High prices are
 the free market's mechanism for ensuring that economic
 resources flow to their most highly valued uses. On the
 demand side, high prices guarantee that scarce goods are
 allocated to those buyers who place the highest value on
 them.
 
 Consider the effect of requiring that ice not be sold for
 more than $1 a bag. Smith, whose time in the cleanup effort
 is valued at $10 per hour, wants ice to ensure that the
 groceries in his refrigerator, worth $50, do not spoil.
 Jones, whose time in the cleanup effort is valued at $75 per
 hour, wants ice so that the $300 worth of meat in his freezer
 does not spoil. At $1 a bag, so many people want ice that a
 huge line forms outside any store where it is available, and
 the average buyer has to stand in line for four hours to buy
 it.
 
 The real price of ice to Smith is $41 ($1 price tag on the
 ice plus $40 worth of lost time). Similarly, the real price
 of ice to Jones is $301. Smith gets ice because the value of
 the ice ($50) exceeds the real price he has to pay ($41);
 Jones does not get ice because the cost ($301) exceeds the
 value ($300). Note, however, that Jones would gladly have
 paid $50 plus 10 minutes' time for the ice, while Smith would
 not. The ice gets allocated improperly -- i.e., to the person
 who values it less. Moreover, society loses four hours of
 productivity from Smith, slowing the recovery.
 
 On the supply side, high prices motivate producers to
 increase production. At $200 per sheet of plywood, $10 per
 bag of ice and $600 per chain saw, contractors nationwide
 will rent planes to ship plywood, ice and chain saws to
 Charleston. At artificially low, restricted prices, no one
 will bother and demand will continue to exceed supply.
 So why were price controls embraced so fervently by
 Charleston? Almost certainly it is because every individual
 has an incentive to alter the distribution of income in his
 favor and most individuals have a distorted understanding of
 prices.
 
 No economist is surprised that an individual prefers
 paying $1 per bag to paying $10 per bag. We suspect these are
 the prices Smith thinks are the relevant prices of ice. But
 they are not. The relevant prices are $10 (the nominal price
 before the restrictions were imposed plus no lost
 productivity from waiting in line) vs. $41 (the $1 nominal
 price after the restrictions were imposed plus $40 lost
 productivity from waiting in line). The Smiths of this world
 do not squeal about paying real prices of $41 for ice, but
 they scream bloody murder about paying nominal prices of $10.
 
 And, as with virtually all redistributive fights, the
 screaming occurs only when the redistribution threatens to
 hit home. When the Boston Celtics' star forward, Larry Bird,
 goes down with an injury and the Celtics are desperate to
 trade for a forward to fill the gap, everyone expects other
 teams to take advantage of the Celtics' temporary misfortune
 by demanding higher-caliber players in trade than they might
 otherwise have requested.
 
 When there is a temporary imbalance in the labor market,
 such as with high school math and science teachers, nurses,
 and computer security personnel, those available are in a
 position to "gouge" employers for high salaries. Politicians
 are not deafened by squealing from the constituents about
 profiteering.
 
 The redistributionist incentives underlying price controls
 imply that specially interested parties will always attempt
 to subvert the efficient working of prices to quickly solve
 temporary demand-supply imbalances. Taking advantage of the
 AIDS situation was, no doubt, the motive that spurred
 Burroughs Wellcome, the manufacturer of AZT, to develop the
 only known effective drug against that disease. Victims made
 it clear that they were willing to pay high prices for such a
 drug, and that spurred the drug's development. Politicians
 even contemplating helping AIDS sufferers who ask for relief
 from Burroughs Wellcome's monopoly prices severely damp the
 incentive for entrepreneurs to develop other such drugs.
 
 For fast, efficient reaction to problems caused by natural
 disaster, the price system can't be beat.
 ---
 Mr. Laband is an associate professor of economics at
 Clemson University.