I feel this question presupposes two things: 1. That an arbitrary person can buy their way out of a disaster (because we wouldn’t want to use a market if people can’t participate)

Not necessarily ‘an arbitrary person’. If there are people who cannot afford to purchase essentials in the aftermath of a disaster, then the most efficient solution is not to cap the price, but to provide targeted support to those who find the essentials are beyond their means. Why?

  1. Hoarding. With limited supplies of scarce, but cheap goods, people who are early will clear the market well before all the demand has been fulfilled, leaving lots of people in need. Consider the example of the scarce hotel rooms. Low prices don’t discourage relatively frivolous usage of the scarce commodity.
  2. Black market. Some of the hoarders may see opportunity to make a quick buck by reselling their supplies at prices those in need are willing to pay. You could argue, what’s the difference with letting markets work? The difference is, just like with ticket scalpers (or touts as we call them): the profit is going to an intermediary who is not capable of (and has no interest in) increasing supply. The goods remain as scarce as ever.
  3. Lack of price signal. Consider the example of the construction worker. If prices in Charlotte hadn’t gone up he would not have bothered. But because they did, supply shifted from Rayleigh to Charlotte. People in Rayleigh whose need for a carpenter was not terribly urgent would wait until normality returned; others would pay the higher prices that prevailed in Charlotte. This meant that those in higher need were served first.

2. That markets are always the most efficient means of distributing resources (because a disaster changes behavior, and we would want to distribute resources in the best way given the circumstances).

Does behaviour change during disaster? Sure, people will share their own possessions with others if they can — share their house, their equipment, their supplies even. But this is redistribution, dividing up what is already there. It does nothing to ensure supply is increased and additional goods are dispatched to match the demand.

The thing that people who reject the role a market can play tend to overlook is that, ultimately, all commodities are scarce. Every bottle of water going to a disaster area is not going to someone in normal circumstances. The idea that it is possible to have some sort of master controller who can decide how much water, tinned food, plywood, and so on needs to go where is not tenable. A much smoother, and more efficient mechanism is to use prices.

If prices for bottled water temporarily rise, then people who don’t need it as much will postpone part of their purchases, and only buy what they really need in the short term (especially if they know the rises are temporary). If not, they will continue their normal purchase pattern, and thus exacerbate the scarcity.

Correct me if I’m wrong about 1 and 2, but I think both points can be very well argued against making this question, in my view, almost as much about glorifying the market as it is about helping disaster victims.

This is not about glorifying the market, it’s about recognizing how markets can help both with the most efficient distribution of scarce goods, and with encouraging a rise in supply.

Written by

Accidental behavioural economist in search of wisdom. Uses insights from (behavioural) economics in organization development. On Twitter as @koenfucius

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