The Free Press
It turns out three things are inevitable: death, taxes, and politicians eager to stop so-called price gouging in the aftermath of a natural disaster. Whether it’s a hurricane in the Carolinas, an oil spill in the Gulf of Mexico, a devastating flood in New Orleans—or a catastrophic fire in Los Angeles—one of the first moves in the politician’s playbook is to condemn the greedy capitalists who exploit the misery of their fellow citizens by jacking up prices on basic necessities.
Sure enough, here was Mayor Karen Bass on Sunday, fresh from her trip to Ghana, taking to X to proclaim that the city would have “no tolerance” for anyone who “illegally hiked rents and prices.” California attorney general Rob Bonta chimed in: “We should not be engaged in price gouging, whether it’s groceries or rent. We are very serious about this.” And Governor Gavin Newsom signed an executive order that aims to prevent price gouging on building materials, storage services, and other essential supplies and services for the entirety of 2025.
At first glance, you can hardly blame them. After all, what kind of monster would take advantage of their neighbors’ desperation by hiking prices for necessities when the supply of those necessities is depleted? Is there anything worse than thinking about your profit margin in the midst of tragedy?
Actually, there is. Keeping prices low during a disaster by making it a crime to raise them will do far more harm than good.
Let’s give Bass, Newsom, et al. the benefit of the doubt and assume their motives are pure. But there’s nothing compassionate about preventing prices from rising during a tragedy. The opposite is true. In the inevitable shortages that follow a catastrophe, what is most needed are higher prices, which will encourage additional supplies to show up. That’s what will ultimately defeat those shortages and bring comfort—and ultimately bring prices back down somewhere close to where they were before.
It’s certainly true that for those who are able to get their hands on scarce goods at a bargain price, low prices are a godsend. But their very scarcity guarantees that those goods will quickly run out, and all but the lucky few will get nothing at all. Where’s the compassion in that?
Laws against raising prices during a disaster accomplish one thing: They ensure there won’t be enough to go around. You can try to stop prices from rising by decree or threat in the name of preventing exploitation, as Mayor Bass and Governor Newsom are doing. But that just guarantees that whatever is in short supply won’t be available to the multitudes who desperately need it. It’s a different kind of tragedy than paying a premium for a necessity.
There’s a reasonable counterargument from the bighearted: That’s all well and good for the rich, but when prices rise after a disaster, the poor will be priced out of the market. And many will be, at first. But keeping prices artificially low by law just ensures everyone is punished. There’s less stuff than there otherwise would be and no incentive to increase the amounts available. By definition, only a few people will get the scarce goods. After all, they’re scarce. There’s a certain equity there, but it’s an equity of deprivation. By letting prices rise, you set in motion the incentive to make sure everyone, rich and poor, can get the goods. How else will people be motivated to bear the extra expense of bringing in goods in high demand quickly? Without higher prices, it’s not worth it.
For example, Governor Newsom doesn’t want there to be any increase in the price of building materials. That means that the available supply is roughly whatever was available before the fires. But what’s needed is an enormous increase in construction materials and construction workers. We want them to come to L.A. from all over the country to help rebuild what has been lost. What will bring them to disrupt their previous plans and make their way to L.A.?
True, there are always generous people who will rent trucks and buy up construction materials at their own expense and come to Los Angeles. And you’re seeing an outpouring of generosity in L.A. right now. But if you let people cover the costs of their time, transportation, and the rearranging of their lives, then more will come. Let them make a profit, especially a big one (even though it will be short-lived) and supplies and people will fly into L.A. The greater the profit, the greater the number of people even farther from the fire’s epicenter will find it worthwhile to make the journey.
Should we despise people who are motivated by money to help their fellow citizens in distress? A person who mitigates tragedy but only at a price may not be as virtuous as those who do it out of the goodness of their hearts and sacrifice their own money. But in the general scheme of things, such virtue is rare. To help the desperate, we need a way to motivate people to come to their aid. Higher prices do the job. You are free to preach the virtue of kindness to inspire virtue. But in a crisis, higher prices bring results. If I am hungry or thirsty, please give me the chance to pay a premium. I prefer that over getting nothing at all.
In Los Angeles right now, the most visible example of higher prices in the wake of the disaster is rent, where reports are rampant of increases of 20 percent or more. “We’re seeing astronomical rent increases,” Chelsea Kirk, a tenant advocate, told the online publication LAist.
Do these arguments on the benefits of letting prices rise apply to rent increases? After all, isn’t the quantity of housing fixed? Surely there can’t be a supply response to higher rents for months, or maybe years. Letting rents rise seems like the cruelest blow to people desperate to find a place to stay while they recover from the loss of their home.
But if you let rents rise, people who have opportunities to live outside of L.A. will exercise that choice and free up places to stay for people with fewer choices. Some will decide not to move to L.A., allowing people who need to stay there to do so. As before, some will consciously stay away out of the goodness of their hearts. But most people won’t even think about it. They’ll see higher rents in L.A. and choose a different city. The people who desperately need to stay in L.A., poor and rich, for a job or for any other reason, will have more options.
Right now, friends and family have opened their homes to people whose homes have been lost. But let rents rise and people will open their homes to strangers. The kindest among us will do so and charge nothing. But you’ll get a lot more places available to stay if you let people charge what the market will bear for housing others.
Decrying price gouging, or worse, keeping prices from rising in a crisis, is the worst kind of virtue signaling. Holding prices down punishes the people it purports to help. And it makes sure that the natural forces that would end shortages are kept from doing their job, prolonging suffering. If politicians really want to help after a disaster, they should be praising price gouging instead of condemning it.
Russ Roberts is the president of Shalem College in Jerusalem, the John and Jean De Nault Research Fellow at Stanford’s Hoover Institution, and the host of the podcast EconTalk. His novel, The Price of Everything: A Parable of Possibility and Prosperity, explores the role of prices in our everyday lives and in the aftermath of natural disasters.