James D. Gwartney, Richard L. Stroup, Russell S. Sobel. "Economics. Private and Public Choice"

Published by @birdwatcher on 2020-02-06

The Imposition of Price Ceilings during Hurricane Hugo

In the fall of 1989 Hurricane Hugo struck the coast of South Carolina, causing massive property damage and widespread power outages lasting for weeks. The lack of electric power meant that gasoline pumps, refrigerators, cash registers, ATM machines, and many other types of electrical equipment did not work. In the hardest hit coastal areas, such as Charleston, the demand for such items as lumber, gasoline, batteries, chain saws, and electric generators increased dramatically. A bag of ice that sold for $1 before the hurricane went up in price to as much as $10, the price of plywood rose to about $200 per sheet, chain saws soared to the $600 range, and gasoline sold for as much as $10.95 per gallon. At these higher prices, individual citizens from other states were renting trucks, buying supplies in their home state, driving them to Charleston, and making enough money to pay for the rental truck and the purchase of the goods and to compensate them for taking time off from their regular jobs.

In response of consumer complaints of “price gouging,” the mayor of Charleston signed emergency legislation making it a crime, punishable by up to 30 days in jail and a $200 fine, to sell goods at prices higher than their pre-hurricane levels in the city. The price ceilings kept prices down, but also stopped the flow of goods into the area almost immediately. Shippers of items such as ice would stop outside the harder-hit Charleston area, to avoid the price controls, and sell their goods. Shipments that did make it into the Charleston area were often greeted by long lines of consumers, many of whom would end up without goods after waiting in line for up to five hours. Some of the lucky people who got these items would then drive them back out of the city to sell them at the higher, noncontrolled prices. Shortages became so bad that military guards were required to protect shipments of the goods and maintain order when a shipment did arrive.

The price controls resulted in serious misallocation of resources. Grocery stores could not open because of the lack of electric power; inside the stores, food items were spoiling – thousands of dollars’ worth, in some stores. Gasoline pumps require electricity to operate, so, although there was fuel in the underground tanks, there was a shortage of gasoline because of the inability to pump it. Consumers were faced with problems of obtaining money, as ATM machines and banks could not operate without electric power. Hardware stores that sold gasoline-powered electric generators before the hurricane typically had only a few in stock, but suddenly hundreds of businesses and residents wanted to buy them. In the absence of price controls, these generators would have risen to thousands of dollars in price. Individual homeowners would have been outbid by businesses who could have put generators to use in opening stores and gasoline stations and operating ATM machines. It would have been these uses that could have generated enough revenue to cover the high price of the generators. Individuals who had generators at home would have even found it in their interest to sell them to businesses for the high sum of money involved.

However, the price ceilings prevented prices from allocating these generators to those most willing to pay. Instead, individuals kept their generators, and it was commonplace for hardware store owners who had a few generators on hand to take one home for their family, and then sell the others to their close friends, neighbors, and relatives. In the absence of price rationing, these nonprice factors played a larger role in the allocation process. While these families used the generators for household uses (such as running television sets, lighting, electric razors, and hair dryers), gasoline stations, grocery stores, and banks were closed because of their inability to buy generators. Thousands of consumers could not get goods they urgently wanted because these businesses were closed. In addition, the flow of new generators into the city effectively ceased, and some were being taken from the city to the less-damaged outlying areas to be sold at higher (noncontrolled) prices. Without price controls, the price of generators would have been bid up to the point where they would be (1) purchased by those who had the most urgent needs for them, and (2) imported into the city fairly rapidly because of the high prices they commanded.

The secondary impacts of the price controls used during Hurricane Hugo in Charleston, South Carolina, highlight the importance of understanding economics and the role of prices in our economy. It is during emergency times such as this, when major reallocations of goods and resources are needed, that reliance on market-determined prices is of most importance. Despite pleas from economists in local newspapers and in the Wall Street Journal, the price controls remained in effect, increasing the suffering and retarding the recovery of the areas most severely damaged by the hurricane. See David N.Leband, “In Hugo’s Path, a Man-Made Disaster,” Wall Street Journal, September 27, 1989, p. A22; and Tim Smith, “Economists Spurn Price Restrictions,” Greenville News, September 28, 1989, p.C1.