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Hawaii Gov. David Ige declared a state of emergency this week, which among other things, triggers a that caps the prices of all goods in the state during the duration of the emergency. Although well-intentioned, the price cap is likely to exacerbate shortages and lead to a misallocation of emergency goods.

Hawaii state law that, “Whenever the governor declares a state of emergency for the entire State or any portion thereof … there shall be prohibited any increase in the selling price of any commodity, whether at retail or wholesale level.”

These types of “price gouging” laws have typically worsened shortages and led to a misallocation of resources, according to a published by the Journal of Competition Law & Economics, which examined the effects of price-gouging laws on gasoline during Hurricanes Katrina and Rita. According to the study, the price controls typically resulted in either shortages or long lines, disproportionately affecting lower-income families and consumers in rural areas.

The problem is that price caps do not incentivize suppliers to incur the additional costs needed to rush goods to the affected area, or to transport goods to rural areas. As the researchers wrote, price caps “make shortages worse by reducing the incentive to provide additional supplies.” This also causes shortages to last longer than they otherwise would, said the researchers.

Rather than price controls, the researchers recommended letting the natural price system solve shortages through “surge pricing,” which incentivizes suppliers to spring into action.

Long-Lasting Shortages

Surge pricing already is very familiar to many in Hawaii, thanks to recent public discussion about how it motivates ride-hailing drivers onto the road during periods of increased demand, serving customers better and easing pressure on prices.

Price caps triggered during previous emergencies in Hawaii resulted in long-lasting shortages and a misallocation of resources. In , Tropical Storm Iselle left thousands of families on Hawaii Island in the dark without flashlights, ice or generators. Many stores at the time were sold out of disaster-relief items even 10 days after the storm.

At the time, economist Harry Messenheimer said, “Allowing stores to increase the price would send a signal to entrepreneurs to bring more goods to the island. There would be enough for everyone.” Instead, the low prices discouraged suppliers from sending badly needed goods.

At the time of this writing, many emergency goods are already sold out at many Hawaii stores. To ensure that such products don’t go completely missing during the difficult and challenging period ahead of us, the state should nix the statute that triggers price controls when state emergency proclamations are issued.

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