How the market can solve most problems after a natural disaster

It is getting ugly in the northeast in the wake of Hurricane Sandy. This story details fights at gas stations as people line up for fuel for their cars and generators. The state troopers have been deployed to gas stations to protect people.

The irony of these stories is that there is absolutely no reason for shortages in a truly free market economy. If the market were allowed to work, there would be plenty of gasoline and there would be no fights and no need for state troopers. Let me explain.

The source of the problem is government. Governments in New Jersey and New York have what are called “price gouging protection” laws. New Jersey is already investigating retailers who are charging more than the fair market price.

Laws against price gouging seem, at an emotional level, to seem “fair.” If a gas station charged $4.00/gal before the hurricane, how can it possibly justify charging $8.00/gal (or more) immediately after? Isn’t that taking advantage of people?

The fairness argument completely ignores the realities of the world and ignores the fact that “price gouging” (ie, temporarily charging higher prices) helps consumers much more than it hurts.

In a controlled market, without “price gouging,” there are shortages. Shortages hurt people by not allowing them to buy the stuff they want. Controlled economies like Cuba and North Korea have anti-price gouging on a national scale, but of course people cannot buy anything beyond the most basic items. So, are consumers happier with a controlled economy or in a free market economy?

The entire free market system is about matching willing buyers with willing sellers. You may think that the “fair” price of an ipads should be $50, but the reality is that they cost several hundred dollars, even used on Ebay. The only “fair” price is what the market will bear. Now let’s say there is suddenly a shortage of the vital components in all tablets. Apple and Samsung and other providers all announce that because of this shortage they have to double their prices. Is this “price gouging?” No, it is simply a reality of the market.

Now the great thing about a free market is that some enterprising company will come up with a way to build tablets using new components, and prices will come down. Apple and Samsung will either switch to the new technology or they will go out of business.

The exact same principle applies during a hurricane or other natural disaster, or it would apply if government did not get in the way with regulations and anti price-gouging laws.

There is a huge demand for gasoline in the northeast right now, right? How would a truly free market deal with this? Entrepreneurs would be renting gasoline tankers filled with gasoline and driving them to New Jersey. In fact, they probably would have arrived the day after the storm. And in a truly free market, there would be thousands of them deployed wherever people needed them. These entrepreneurs would develop mobile pumping mechanisms that would safely allow you to drive up to the tanker and fill up your car.

Of course, you would pay $10/gallon or perhaps even more at the beginning. But as more and more tankers dotted the landscape, the price would come down, and after a few days you would probably only pay the current market price of $4/gallon.

So, why don’t people do this today? Government regulations prevent you from pumping gas from a tanker. Obviously, there are safety concerns, but the technology to make such mobile pumping safe is not rocket science and could be developed. And of course you would be considered a “price gouger” and might be thrown in jail.

So, the bottom line is that government once again is preventing consumers from getting what they need. Such policies, in addition to causing inconvenience, are a threat to people who cannot be without power for days on end. These people would happily pay $10/gallon temporarily if they knew it would help keep them alive.

There also is huge shortage of batteries, candles, water, food, chain saws and other necessities during a storm. There is absolutely no reason — except for anti-price gouging laws — that trucks filled with such products do not flood into New York and New Jersey. In fact, the black market does of course offer these things, but prices are much higher than they would be if such commerce were legalized.

The bottom line is that supply will follow demand if the market is allowed to work. People who want gasoline, batteries and chain saws will get them if we allow willing sellers to connect with willing buyers. And the reality is that any price-gouging that takes place will be temporary. Within a week or even less, the market will bring prices down and the tankers and trucks selling goods will disappear as the electricity gets turned on and markets return to normal.

The market is the cure if we allow it to function.

I’d like to mention three more fallacies that you will be hearing during this disaster. One, that it will be good for the economy because of “stimulus;” two, that FEMA is doing a great job and three, that this “proves” that storms are becoming more frequent and more powerful. These fallacies are successfully debunked here.

One the subject of good news, however, the Church is once again proving to be the most efficient responder of all to natural disasters. You can read more about the Church’s heroic response here.

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About Geoff B.

Geoff B graduated from Stanford University (class of 1985) and worked in journalism for several years until about 1992, when he took up his second career in telecommunications sales. He has held many callings in the Church, but his favorite calling is father and husband. Geoff is active in martial arts and loves hiking and skiing. Geoff has five children and lives in Colorado.

33 thoughts on “How the market can solve most problems after a natural disaster

  1. I just thought it wsa interesting that both Pres Obama and Gov Christi “waved” all red tape, which just is proof that govt is red tape and red tape gets in the way.

  2. Aaron, excellent catch. I lived through a half-dozen hurricanes in South Florida, and in each case there was a mismatch between supply and demand, and price gougers were prosecuted simply for trying to meet demand with supply. I am not sure how that helps anybody. In addition, I would like to point out that when you make normal market activities illegal it simply encourages organized crime, which will always find ways to either pay off or circumvent the authorities.

  3. Great post, Geoff. Truly free markets tend to right themselves, even if there is a short term spike. Why do computers and televisions get cheaper? Because of competition in the supply and demand. Since there are only a limited number of gas stations functioning, and getting fuel to them is tricky with roads blocked, etc., it does not give companies incentive to bring in extra. Thus the long lines. We see this in many countries that over-regulate, often meaning people stand in line for regular groceries.
    With “price gouging, environmental and safety issues barring the way to a free market, the people have to deal with a shortage. Personally, I would pay $10/gallon for gas for a few weeks, if it meant I didn’t have to wait hours in line and hope they had gas when I got to the front of the line.
    At the Bleeding Heart Libertarian blog, they discuss this same issue:

    In their discussion, they say that those providing services such as tree cutters, plumbers, carpenters, electricians, etc., are allowed to price gouge. There will be many hundreds of such people flocking to the area and being hired to fix things so people can get back to their regular lives. They will price gouge, charging double what normally would be charged. But in so doing, people will get back on their feet in weeks, and not months or years.
    Those who price gouge will then spend money in the area ($10 gas for their equipment, water, food, etc), and then spend more later when they return home. This will help the economy in the area, as well as in the localities where they come from.
    And, as you noted, it will not last forever. All those carpenters and others will eventually leave. Life returns to normal, and prices go back to where they were before the disaster.
    For those who cannot afford the higher prices, the government can step in and assist if necessary to provide the basics.

  4. Over at some other prominent Mormon blog, there’s a link to here that basically condemns Geoff as a tool of the devil.

    I’d have to say – at M* there’s a general policy (most stringently enforced by Geoff, interestingly enough) to not bad mouth other bloggernacle blogs (one reason I’m not mentioning a name or linking to it). Other bloggernacle blogs, though, apparently have no compunction about badmouthing and being self-righteous about M* – yet they accuse us of being intolerant and retrograde. I’ll let their actions speak for themselves.

  5. “Entrepreneurs would be renting gasoline tankers filled with gasoline and driving them to New Jersey. In fact, they probably would have arrived the day after the storm.”

    Seriously?? There is the minor detail of power outages and impassable roads. In many areas of the region school has been out for a week because the school buses can’t get through to pick up the school children. Many traffic lights haven’t been operating.

    Have you ever been on the roads (besides the interstate) in New York, New Jersey, Connecticut, Pennsylvania, or Rhode Island? The thought of out-of-towners driving large gasoline trucks on unfamiliar winding roads scares me. Or the thought of out-of-towners driving trucks into any of the large cities in New Jersey or neighboring states. That’s a real nightmare scenario.

    And, by the way, who’s renting out all these gasoline tankers?

  6. Researcher, I have spent a lot of time driving the roads in Morris and Bergen counties in New Jersey. I still go there on business several times a year. One of the primary reasons that there is a shortage of gasoline is that electricity is off so the pumps don’t work. It doesn’t take a genius to see that a tanker could drive on an interstate and pull off in a gas station where the pump is not working, set up a temporary pump they brought with them and then pump gas from the tanker. You can rent just about anything if you are willing to pay for it. Tractors and 18-wheelers get rented — why not a gas tanker? The point is that state regulations prevent this today, so there is no demand for people to take the risk. I lived through many hurricanes in Florida, and people from around the country would drive in with their trucks to clean up debris after a hurricane. They easily made a $2-3,000/week. There is no reason to think that similar entrepreneurial spirit would not take place if people were allowed to legally offer their services. The irony is that I bet people in New Jersey and Staten Island would pay $20/gallon for gas right now — if only they could get it.

  7. This is a poor argument. In a free market economy, if you raise your price from $4 to $8 or whatever in a situation like this, you get short term gain, long term pain, as people become disenfranchised by your price change. It’s actually better for you in the long run to run out of supply and only marginally raise the price to cover the gap. The marginal increase covers the shortfall you had for the outage period, and is absorbable by the people.

  8. Trevor, yes it would. It has been in the past, especially in the 19th century when we study, for example, how quickly the petroleum industry in PA developed after the discovery of oil. There are still small areas of the economy that have not been completed ruined by government, such as high-tech industries, lasik surgery and a few other areas. Having lived through many hurricanes myself, I can tell you that hurricanes tend to bring the entrepreneurs out of the woodwork. The market is an incredibly powerful force — if allowed to function.

  9. Researcher – what are you talking about? People are driving from across country, through Jersey, through Manhattan, and on to Long Island. I know some of them.

    People are waiting in line by the dozens outside of Home Depot to buy generators. I know in some other instances, people have brought trailers full of generators into NY to sell.

    We need more free market in this area, not less. Look at the efficiency of Walmart. I am pretty sure that Walmart is better at moving palettes of water for a cheaper price than FEMA.

    I don’t have the exact answer as to how you put all the pieces of the puzzle together to get the optimum outcome, but that’s just the point. None of us do. No one or group of people in government or the private sector do. Thousands, tens of thousands, millions of individuals pursuing their self-interest will yield a better result than a command economy. Just as hundreds of businesses and millions of customers, combind with hundreds of charities will provide a better outcome than FEMA, etc. alone.

    So where I see the roll of FEMA, government, etc. would be to help facilitate a private sector response. Not picking winners and losers, but helping consumers find a way…

    BTW – I’m complete confused at the BCC link here. I don’t even understand at what they are insinuating. That the private sector is bad in cases like this? If it were not for Walmarts, Home Depots, charities, etc. tens of thousands in the NY area would be dead.

  10. BCC is insinuating that allowing flexible prices in a time of exogenous shocks to demand is akin to taking advantage of your neighbor who suddenly has an urgent demand for gas/food/water/other item that should be stored for emergencies. They think that Geoff, by arguing that the suddenly unreplaceable stock of goods should be allocated on a highest willingness to pay basis, is digging a pit for his neighbor, or taking advantage of him/her/it. Because, you know, market forces are of the devil.

  11. Ah yes, it would be so wonderful for the market to be allowed to run its course, so that at least for a few crucial days, the poor would be without necessary supplies for survival, all so that others can take in incredible profits.

    Whatever the market theory, are we not to use Jesus as our model? Can anyone make the case that Jesus would say “jack up the price as much as the market will bear—it will be for their good in the long run, and you can make a killing in the meantime!” Is that how charity, without which we are nothing, works?

    Interesting that the example of PA and the oil industry before government intrusion was brought up. Strange, though, that while the development of the commodity in a freer market was praised, but no one mentioned the unbelievable pollution and worker injury/illness that also resulted until government stepped in. Or how about the case of the mining industry in Park City, where owners raked in vast sums of lucre, while paying pitifully small wages and allowing frequent worker injury, illness, and death by completely neglecting safety guidelines and tech that was available at the time, not paying a dime to injured workers or surviving family. But hey, that’s the price of progress in a glorious free market without government involvement, eh?

  12. Derek, if there is one thing we have learned from this hurricane is that the poor and the middle class are all not getting supplies. The wealthier can either pay more through the black market or can leave for a few weeks until the lights get turned back on, but if you are poor and/or middle class you are stuck and must stand in endless lines for gas, batteries, water, ice, etc. This is the way it always is after natural disasters.

    It is also true that the rich have more vacations in Bermuda, more ipads and more diamond rings. This is the way it has always been and the way it will always be until the Millennium. Markets exist in Communist Cuba and North Korea — they are simply underground and illegal. In such underground systems, the very wealthy linked to ruling class get stuff and the rest of the people get nothing.

    Interestingly, this is exactly what we are seeing in New Jersey and New York right now: the very wealthy in Manhattan are doing OK, but the middle class and poor in Staten Island and the Bronx have been without lights for five days and have to scrounge for everything. Go on Ebay and Craig’s List and you will see people selling gasoline for $20 a gallon. My solution — allowing the market to function — means more people will bring in stuff and the middle class and poor will at least get something. You “solution” — disparaging the market — means maintenance of the status quo, i.e., a black market system that favors the wealthy.

    My question to you, Derek, is: why do you love the wealthy and hate the poor? It seems your philosophy is the exact opposite of that in the scriptures.

  13. How will having the poor, who can often barely afford these items under normal circumstances, be able to access it with the prices doubled or trebled? It’s a nonsensical argument.

    Interesting you didn’t answer my question: Do you think Jesus would encourage you, or any other provider, to raise their prices, to seek to make as much profit as possible, in response to tragedy? Is that the Christ-like thing to do?

    free market philosophy is based on greed and selfishness. Milton Friedman candidly asserted that a business has no responsibility other than profit maximization. Putting aside whether or not government should be involved, is that the principle under which the Gospel asks us to act?

    You can twist the question all you want. It doesn’t make it true. My solution is hardly status quo: It’s about ignoring market philosophy in favor of kindness and charity. That (market theory; that people are motivated by selfishness, that the rich will always have more) has always been true? Not if the Book of Mormon is true: In the righteous societies in that book, there was *no rich* and no poor. None. They got there by following the Gospel of love and charity, not self-interest. Moral people can choose to go in and provide those items to the poor without the motive of a jackpot payday; they would and should do it because they want to help their brothers and sisters. To suggest that people *should* act otherwise doesn’t seem terribly charitable.

  14. That should have been “How will it be helping the poor…by offering them the goods at prices…”

  15. Derek, once again you are showing that you hate poor people and want more people to be poor rather than to have a decent standard of living. Please tell me: were there more poor people in Communist China in 1970 with a completely controlled economy, or are there more poor people in a more market economy today? Same applies to India, East Germany, Hungary, Estonia and on and on. Literally hundreds of millions of people have been lifted from poverty into the middle class in China, India, etc in the last 40 years. The truth is that markets lift people from poverty by helping them produce things and helping match willing buyers with willing sellers.

    I find it strange that I must even write this because it is Economics 101, but supply increases to match demand. So, if today gas can be sold for $20/gallon (see Craig’s list), only the richest people can get it. But if the market were liberalized, and supply increased as I discuss in the OP, then the price of gasoline would go down and the middle class and poor would be more likely to afford it. What now costs $20/gallon would cost $10/gallon, then $8/gallon and then eventually it would arrive at the current market price of about $4/gallon.

    So, Derek, stop grinding the faces of the poor. Allow them to buy the things they need instead of pretending you know what’s best for them. Thank you.

  16. And to answer your question, if I were living in PA and my neighbor came to me with a business proposition that we buy gallons of gas for $4/gallon in PA and truck it into NY and sell it for $10/gallon, I would do so with the knowledge that I am acting like every other entrepreneur in the history of the world who has bought something for a lower price and sold it for a higher price. This is what Steve Jobs did: he came up with an idea, put together a new technology, bought stuff for a cheaper price and sold it for a higher price. And people benefitted from ipads and iphones because of his actions. People in NY who are only faced with $20/gallon gas would benefit if somebody came in selling gas for $10/gallon from the back of their truck. Jesus showed many times that he values hard work and values people supporting their families. And the beauty of the marketplace is that it is mutually beneficial.

    The Church takes tithing money and gives stuff away for free, and this is a great thing. I pay a lot of money in tithing, and I celebrate every time the Church responds to a natural disaster. But the Church can only help perhaps 1 percent of the people. It is the market that can potentially help the other 99 percent — if only people like you would stop grinding the faces of the poor by preventing the market to function.

  17. Now you are creating a false binary option: That we either have a pure market economy, or we are communist China. There is, in reality, a spectrum. Either end is disastrous. The best option involves a mixed economy, with some restrictions on certain types of harmful economic activity, and safety nets for those crushed along the way. But more importantly, the best option involves people choosing to act charitably, selflessly, rather than only looking out for numero uno. We should encourage that rather than rationalizing and encouraging selfishness and greed.

    Yes, supply eventually increases to match demand. Eventually. Great. But what about those who cannot afford supplies necessary for survival in the meantime, because we say that everyone should go in distributing goods for the highest price the market will bear? More sacrifices to appease the God of the Market?

    Rather than pretending the poor can buy what they need at gouging prices, as you’re suggesting, why not supply it for free? Yes, you can act like any other entrepreneur in the history of the world. But are we not told in the Gospel to be in the world but not *of* the world? Doesn’t Christ call us to a higher level of morality than what the natural world (natural man?) does? Yes, he valued hard work—especially hard work done in the service of others.

    Yes, the Church can only help so many people. But *people*, particularly people willing to give more rather than just being content with the tithing commanded (what does God say about those who must be commanded in all things?), together can do so much more if they seek to serve and help rather than merely enrich themselves.

  18. I’m confused: How is a call to give and serve the poor, which is a call Jesus made (he didn’t tell the rich young man to go engage in lucrative, “mutually beneficial” market activities with the poor), “grinding the faces of the poor?”

  19. Derek, the world for latter-day Saints is about two contradictory tendencies that are difficult to work out sometimes. On the one hand, we are told to sacrifice ourselves and work for the poor and others in need such as widows and the seek and helpless. On the other, we are told to be good stewards and providers for our families and to go to school and work hard while we are doing it. So, if you go to school, you usually graduate with some debt. And when you get married, you have kids, and you need to buy milk for them and provide a home for them, so you have to work. You can’t give away everything you have because then you and your family go hungry.

    So in some ways the Gospel is clearly contradictory: we are told to be selfless, but we need to be somewhat selfish sometimes if we are going to live in the world. Clearly, balancing these things is difficult for all of us.

    There are many problems with comments like yours — and believe me, they happen every day in the Bloggernacle. The first problem is that you offer up only condemnation for people who make money in ways you don’t approve of. This is intolerant and small-minded. The second is that you are calling on other people to give away things without knowing their circumstances. Some people who you may think are “price gouging” may simply be using what little money they have to make a little more money so they can feed their families. The third problem is that you are calling on other people whom you don’t know to give away things when you are unwilling to do it yourself. The world is filled with people a lot poorer than you. I know personally literally dozens of people whom I guarantee are poorer than you. Please sell your house, your car, your computer and everything else you have and send me a check, and I guarantee I will get the money into the hands of people a LOT poorer than you, people who live on $50 a month or less. So, Derek, put your money where your mouth is: I will send you my email, and you can being selling your stuff and when it is all sold, please send me that check. I will then introduce you to the people you have helped. There are a lot of people living in tiny shacks who went to my ward in Rio de Janeiro who really need your money. Please don’t make them suffer any longer.

  20. Derek, be honest with yourself: you are not calling on other people to serve the poor. People can do that in their private lives, and most people reading this do that all the time in many different ways. You are making a political statement that somehow the market is bad and that people who make money in ways different than you are immoral. You are being intolerant and judgmental. Until the Millennium, all of us will have to work at something. Most jobs involve compromises of some kind — do you go into work or stay with your sick wife; do you work overtime to make some more money, or do you go to your kid’s baseball game; do you take the job for more money in a distant state, taking your kids away from the school they love, etc. And some jobs involve buying stuff for a cheaper price and selling it for a higher price. People like you talk about helping the poor but you can go do that right now. Turn off the computer and go help the poor. What you really want to do is to condemn people who make decisions about their lives that you don’t approve of. My advice is, in the words of Pres. Uchtdorf: “stop it.”

  21. So, are consumers happier with a controlled economy or in a free market economy?

    It depends. There are winners and losers in either scenario. I think your hypothetical would more accurately be phrased “Am I happier with a controlled economy or in a free market economy?” Which leads me to wonder whether you have taken the time to think through your complaint against Derek: “You are making a political statement that somehow the market is bad…” For you, free, i.e., unregulated, markets are an unalloyed good, though even you admit they fail during emergencies (Cf: “within a a week…markets return to normal.”), but your politically-motivated optimism (I’m tempted to say myopia) fails to take into account the horrors unleashed by unregulated market actors on the vulnerable (like the residents of the tiny shacks in your Rio de Janeiro ward–you can’t tell me their problem is too much regulation) that would cause reasonable interlocutors to prefer more stability over the profiteering “solution” to emergency situations you describe here. I thank God, literally, that those who have been duly elected by the people to run this country have not lost all sense when it comes to emergency response.

  22. I am very honest with myself. My concern, first and foremost, is the all-too-common rationalization of greed as a motivator. Only secondarily and peripherally do I reject the notion that government has *no* role in regulating business. I think you can and have made compelling argument that in *this* sort of situation, it is pointless to try to regulate price-gouging. But there is a difference between accepting the inevitability of price gouging, and celebrating or encouraging it. That encouragement of selfishness I do not accept as coming from a Gospel source. The Gospel calls for people to voluntarily reject those base attributes and aspire to something more.

    Yes, we need to provide for our families. But doing so does not *require* we toss out our morals while doing so. It does not require we justify self-interest as the most noble goal, when Christ as called on us to be selfless. Yes, the world is complicated. Yes, not one of us can follow that call perfectly. But again, there is a difference between acknowledging our flawed nature, and celebrating or encouraging those flaws by embracing selfishness. We are told that we cannot serve two masters, and it seems to me that market idolatry is the worship of Mammon. It is a tool that should be subordinated to the higher cause. I am not judging individuals, I’m judging this message celebrating the lowest of our motives. Yes, we should stop that sort of message, and call on people to act on higher motives, as Uchtdorf does.

  23. Exactly, Peter. We need to recognize the limits of all things, including The Market. It is a complicated issue, and requires much more balance–especially when we are talking about our voluntary choices.

  24. Peter LLC, interesting you should mention Rio as an example of “lack of regulation.” The official tax rate, if a business pays all of its taxes, in most Brazilian states is 110 percent of all profits. Official businesses like the one I worked for had regulators looking at the books literally every single day. The result was a boom in the unofficial, unregulated economy and, of course, lack of jobs for the poor you claim to care about. Brazil is a socialist economy in name. In practice, it is like most third world socialist economies, a corporatist hell for the market where the only businesses that succeed are the ones with connections to corrupt politicians, a bit like Solyndra and the wind farms that are failing across the country like so many dominoes.

    People like you and Derek love to extol the “mixed economy,” which is what we have had for the last 100 years in ever-increasing amounts. The more we mix the more we fail and the more the poor and middle class suffer. Your solution is always more government to solve the problems caused by government. Someday hopefully you will wake up and realize it isn’t working.

    As for your claim that I admit that markets fail in emergencies, I made no such admission. What fails in emergencies is government, not markets. Markets will always exist even in Communist countries. You must have misread my post because what I said was that government prevents markets from functioning, and this is what causes shortages. Markets are the solution to the malfunction to the benefit of the majority.

    Derek, as for greed, well, that will be with us like many other sins for a long time. It is great to encourage people to donate and volunteer — if that is the point you want to make, then that is fine and we can end in agreement. But I am reading a lot more than that into your comments. It seems to me you want to condemn people who are doing nothing than buying low and selling high, and that is simply not going to go unchallenged — unless of course you are claiming that every single person in the history of the world who has made a profit is somehow evil and greedy.

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