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Institutions and Katrina:

Lots of interesting commentary on the relationships between economic institutions and Katrina. In addition to Tyler's post yesterday on the economics of levees as public goods, Vic Fleisher asks whether what happened in New Orleans is a natural or man-made disaster. He's right that to a large extent the disaster has been self-inflicted.

And at least some neighboring states that were largely untouched by the natural disaster apparently feel obliged to inflict at least some of the man-made pain upon themselves. Georgia, for instance, has issued an executive order prohibiting "price-gouging" by gas stations that "overcharge" Georgia drivers. I assume that I need not belabor the economic folly of this sort of legislation for our readers (although imposing anti-gouging rules in a state that did not suffer the natural disaster does seem like a new level of political inspiration). But I can't help but note the great irony that the Governor Perdue simultaneously imposed the price caps, thereby eliminate the market forces that provide incentives to conserve fuel, while going on to encourage drivers to conserve fuel by not taking unnecessary trips over Labor Day weekend and by encouraging business to permit their workers to "tele-work" next week. Then, of course, we get to the most amazing part of the announcement:

Perdue said there is no reason to panic about gas shortages and rising prices....

"There does appear to be some spot shortages in unbranded, spot-purchasing service stations," he said. "We expect that to be a temporary problem.

"There is no reason to panic. There is plenty of gas on the way. The only way we would have problems is if people rush out and try to horde and try to accumulate gasoline they won't need for a while."

Well, there is one other way to prevent unnecessary hordeing, as Adam Smith recognized some time ago, but Gov. Perdue seems to think that is the problem, rather than the solution.

On the other hand, seeing pictures of Biloxi and the Mississippi Gulf Coast, we shouldn't forget that there is certainly a pretty big dose of natural disaster here as well. Although I have a question about that as well. Seeing the wrecked casino boats in Biloxi (the fact that they are boats is a function of laws that effectively required them to be built in that fashion) my first impression was that the law magnified the disaster by insuring that the boats would be completely trashed. Now I'm not so sure--while it increased the ex ante risk of destruction of the casinos, I wonder if this will reduce the ex post repair costs, as unlike a traditional building, they can just build these casino boats elsewhere and just ship them back into Biloxi. I honestly don't know how the economic trade-off works here.

I also wanted to recognize Steve Bainbridge's post on "outsourcing disaster relief" which raises some nifty ideas.

Related Posts (on one page):

  1. Walter Williams on "Price Gouging":
  2. Institutions and Katrina:
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Walter Williams on "Price Gouging":

The people's economist, Walter Williams, patiently explains once again why limits on "price gouging" are counterproductive (I noted Georgia's "crackdown" on price gouging a week or two ago):

The fallout from Hurricane Katrina has featured a lot of ignorance and demagoguery about prices. Let's look at some of it. One undeniable fact is that the hurricane disaster changed scarcity conditions. There are fewer stores, fewer units of housing, less gasoline and a shortage of many other goods and services used daily. Rising prices not only manifest these changed scarcity conditions, they help us cope, adjust and get us on the road to recovery.

Here's a which-is-better question for you. Suppose a hotel room rented for $79 a night prior to Hurricane Katrina's devastation. Based on that price, an evacuating family of four might rent two adjoining rooms. When they arrive at the hotel, they find the rooms rent for $200; they decide to make do with one room. In my book, that's wonderful. The family voluntarily opted to make a room available for another family who had to evacuate or whose home was destroyed. Demagogues will call this price-gouging, but I ask you, which is preferable: a room available at $200 or a room unavailable at $79? Rising prices get people to voluntarily economize on goods and services rendered scarcer by the disaster.

He also explains why the cost that the service stations paid when the bought the gasoline is simply irrelevant:

What about the house you might have bought for $50,000 in 1970 that you're selling today? If you charged me $250,000 for it, today's price for its replacement, as opposed to what you paid for it, are you guilty of price-gouging?

Related Posts (on one page):

  1. Walter Williams on "Price Gouging":
  2. Institutions and Katrina:
40 Comments