Hurricane Economics

By: Frank Yunker

Date: 2017-09-07

Hurricane Harvey is barely over and now we have Hurricane Irma. Everyone knows it’s coming. Newspapers are filing reports of generator sales all over Florida. Home Depot’s distribution network is poised to deliver more goods in anticipation of the worst. And if those generators do not sell in Florida by the end of hurricane season, they’ll be shipped to the Northeast in advance of snow storm season.

Despite Home Depot and Walmart’s best efforts, aggregate supply is likely to shrink (move leftward on a graph). And simple items like bottled water suddenly costs far more than the normal equilibrium market price. With your "X" drawn, shift supply to the left and what happens to price? It rises. And quantity? It decreases. That's natural.

It's only temporary, mind you. With high prices for bottled water, what would you do if you were an enterprising young business major from a neighboring state? You'd bottle water and drive a truck load of it to the stricken areas in order to sell it for that higher price.

It sounds evil, but it's not. It's called "economic incentive." People need a reason to get involved and economics is a great motivator. Specifically profit is a great motivator. So, you get a truck load of water and make a ton of money. You go home, get another truckload of water, return to the scene of the disaster and guess what? Dozens of others had the same idea as you. Suddenly, bottled water is everywhere.

What happens then? When the price of water is temporarily out of equilibrium, the number of people willing to sell it increases - which means aggregate supply re-shifts back to the right and suddenly you are back to the equilibrium market price... or even lower.

In the aftermath of Hurricane Katrina, the government (federal, state and local) all came out looking like under-prepared losers. So, who looked like a winner? WalMart! That's right. When the hurricane was forecast on the horizon, WalMart knew what to do. Based on prior hurricanes and natural disasters, they knew what items were likely to be sold more: candles, generators, bottled water, flashlights, non-perishable food supplies. So, they shipped those items to the stores in the soon-to-be-affected regions in higher quantities. Did WalMart act out of humanitarian concern? They had economic incentive to act. Ironically, the mayor of New Orleans had no economic incentive to get those buses going, so they sat there. (You could argue he had political incentive, but obviously that wasn't clear enough to him.)

It seems it is only after disasters that people realize that economic incentives drive the world.

Years ago, I heard on the radio about a guy from Michigan who bought 20 generators and drove to Mississippi to sell them. He was asking double what he paid (a handsome profit if he gets it… but no one was obligated to buy) and so authorities in Mississippi threw him in jail for "price gouging." In addition, they impounded the generators and placed them in storage. End result? No one got generators.

When laws turn heroes into criminals and prevent the return to normalcy, the law needs to be fixed. There are more than 30 states with price-gouging laws and the real villains are the legislators who voted for them.