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The Economics of a Storm

There are two very predictable behaviors in this day and age:

(1) Whenever there is a gun tragedy, there is an outcry to further limit gun rights and gun ownership, as if limiting legally owned guns will somehow lessen the number of violent crimes, which are by and far committed by illegal weapons or people who possess them illegally.

and

(2) The topic of this little work: Whenever there is a major storm, the likes of Hurricane Katrina, the tornadoes that devastated much of the southeast in 2011, and now, most recently, SuperStorm Sandy, there is always talk of price gauging. We hear it at all levels – from the President, from state governors, and city mayors, just to name some of the most visible.

But let’s examine what happens with a storm and what “price gauging” really is. The undeniable facts are that after a major catastrophe like any of these storms, there is an increase in demand for certain items (usually starting with generators, gas, food, and water, but depending on the event, the list could go on to include plywood, sandbags, flashlights, etc.)

But the specific items are not the real issue. The real issue is that after a storm (or even just before) the demand for these things will rise. With a rise in demand, only two things can occur right away – a rise in prices or shortages of those items. Is there a third option? Nope, not in the short term! In the longer term supplies can be increased to match the increase in demand, but that will not (because it cannot) happen in the short term.

To say it simply: A rise in demand always triggers a rise in prices or shortages.

So let’s go back to our current storm and this talk of price gauging. The governor (or other misinformed leader) declares that raising prices in the midst of (or while recovering from) a storm is profiteering improperly from the storm and such profiteers will be soundly punished. Businesses are told, “No, you may not raise those prices one bit.” So, with no increase in prices, what has to happen? Yes, shortages. They happen every time. Not just some of the time, every time. They are as predictable as the cries of price gauging.

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