Price Gouging During Emergencies

By Nicholas Corona. Stanford University. 

In the wake of the Hurricane Sandy, it is important to analyze the economic principles at work as a part of the relief effort. According to the National Hurricane Center, Hurricane Sandy was the largest Atlantic hurricane, extending 1,000 miles in diameter and causing power outages in 17 states. Consequently, many of these states were suffered serious economic damage. IHS Global Insight estimates the somewhere between $30 billion and $50 billion dollars (~.3% of nominal GDP) in economics losses occurred as a result of the hurricane. Hurricane Sandy, lasting for nine days in late October last year, caused the local markets to experienced sharp demand and supply shocks through those nine days and several weeks after. Consumers were in desperate need of gasoline, electricity, and other relevant emergency equipment. However, because several banks, such as JP Morgan, which closed its banks in New York, New Jersey, and Connecticut, and Bank of America, which closed its banks in New York, people didn’t have access to the liquid capital that was necessary when stores were out of power and trips to the ATM were too dangerous. As for suppliers, much of their infrastructure was either destroyed or put on hiatus for safety reasons. IHS estimates maintain that about $15 billion in infrastructure damage were incurred at this time, matching the infrastructure damage caused by Hurricane Irene, the category 3 hurricane that occurred in August 2011. While active, the Hurricane Sandy put 70% of East Coast oil refineries on hold. The higher risk and costs associated with transportation led suppliers to choose to supply less. As a result, many of the elements needed for “price gouging” were present. Price gouging is the practice of selling goods, usually life-sustaining necessities, at a price higher than normally regarded as fair because some sort of national or local emergency increases consumers’ willingness to pay far beyond the regular market- clearing price.

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