Living Economics

Censoring Pleas for Help
Price control after natural disasters may misallocate scarce resources to less urgent needs

Summary of a report by Dwight Lee

The Freeman

January 1999

Once market prices are recognized as a means of communication, we can understand why government price controls are a particularly harmful form of censorship. And the harm is greatest at times of natural disasters because the victims are desperate to communicate their need for help.

After a natural disaster, prices generally increase sharply for labor, construction materials, electric generators, and a host of other products needed for recovery and comfort. The common explanation for these price increases is that unscrupulous suppliers are profiteering at the victims' expense. Suppliers may be profiting by raising prices, but the higher prices also help disaster victims effectively communicate their need for help to those who are most able to provide it. Price controls prevent this from happening by censoring communication among victims.

With price controls, victims who have the most urgent need for scarce supplies cannot communicate their urgency by offering higher prices. Similarly, there is no incentive for sellers of scarce supplies to sell them to only those who need them the most. So a hardware store owner may sell a much sought-after gas-powered electric generator to his friend to run his electric shaver rather than to grocery-store owners who badly need the generator to keep their thousands of dollars' worth of food from spoiling.

Without price controls, one of those grocery stores would have offered a higher price for the generator, effectively communicating (on behalf of customers) that it had a more urgent use for it than the hardware-store owner's friend had. Of course, without price controls, all those who need generators would have quickly secured them because they would have been able to communicate their need with suppliers outside the disaster area.

Note:
  1. This report may be found at http://www.fee.org/freeman/99/9901/lee.html
  2. This report may be found at http://www.fee.org/freeman/99/9901/lee.html
Access Tools
• Advanced Search
• Browse Micro
Comparative advantage (14) Competitive strategy (27) Costs and opportunities (53) Entrepreneurship (3) Externality (28) Free Market Solutions (17) Free Ridership (3) Game Theory (22) Incentives (13) Income Distribution (25) Information (19) Labor Market (24) Marginal optimization (33) Market Demand (17) Market Entry (9) Market Exit (2) Market Intervention (12) Market Structure (29) Market supply (4) Material Flow (2) Miscellaneous (3) Price Discrimination (17) Pricing Strategy (46) Profit maximization (48) Property Rights (42) Regulation (16) Rent Seeking (2) Risk Taking (12) Scarcity (10) Tastes & Preferences (27) Taxes (7) Technology (9) Type of goods (31) What Price Means (27)
• Browse Macro
Boom and Bust (9) Budget Balance (12) Comparative advantage (13) Economic Development (1) Economic Indicators (6) Fiscal Policy (12) Incentives (1) Income and output (25) Income Distribution (5) Labor Market (6) Money and Credit (20) Regulation (5) Rent Seeking (1) Saving (6) Taxes (4) Technology (1) Trade and Foreign Exchange (30)
• Glossary
List All
Search

• Microeconomics Lectures • Macroeconomics Lectures
Instructor
• Instructor Log in • Sample TOC • Demo/Register • Video Tour
Student
• Student Log in
Close
Instructor Log in

Class
Close
Student Log in


Open Menu
Term
Definition