How to guarantee shortages – make the price signal illegal

New Jersey has apparently made supply and demand illegal. The power of the state will hammer anyone who charges more than the state feels is reasonable by their standards. See Price gouging complaints in New Jersey as merely one report on the topic.

Making it illegal to sell stuff at the market price guarantees the shortages will get worse. Why?

People will panic-buy things they don’t need, retailers may not be able to get replacement stock, and some retailers may have to close their doors when they run out of stuff. 

As a natural and logical result, other people who really need something will find only bare shelves.

But it sure feels good to rant against ‘price gouging’.  Makes for great sound bites on TV.

On the other hand, if you let prices rise, the price signal will allocate the scarce goods to people who really need them. Why?

People who can hold off on buying will do so. Retailers and wholesalers will be highly motivated to figure out some creative way to get more goods into the area.  People who really need the goods will find them on the shelf.

See my earlier post for an illustration on how this worked out quite well during the California gas crunch.

Mark J. Perry at Carpe Diem has a series of posts on the damage caused by price gouging laws.

The best summary is in Anti-price gouging laws are really ‘pro-shortage’ laws:

If the goals were to: a) extend the gasoline shortages in New Jersey for as long as possible, b) make the lines at the pump as long as possible, c) discourage as many gasoline stations as possible from re-opening, and d) maximize the suffering of the citizens of New Jersey, there couldn’t be a more effective method of achieving all four of those outcomes than to vigorously enforce the state’s “anti price gouging” guaranteed shortage and maximum suffering laws.

(One of his writing techniques that I really enjoy is striking out the misleading euphemisms used in our society and substituting a more accurate description.)

It may not make sense at first, but setting an artificial limit on prices during a crisis guarantees shortages.

If you want more explanation, here are a few articles from Carpe Diem:

Maximum temperature law to prevent temperature gouging makes as much sense as laws to prevent price gouging

Price gouging following Hurricane Sandy:  New Jersey vs. DC

Superb comment from the professor in that post:

If you want to guarantee that there will be critical shortages of essential goods following a natural disaster, the most effective way to achieve that outcome is to have laws that artificially prevent prices from rising to reflect the true, underlying market conditions.

Here’s a post that illustrates the panic buying from stockpiling which leaves the shelves bare:

Holman Jenkins: Businesses care more about their reputation with customers than they actually care about their customers

Update:  The government can dictate that you can buy something at the normal price during a crisis but there’s nothing on the shelf.  Someone who really needs it won’t be able to get it.  Why is that okay?  Is that moral?