Recently, in Vancouver, we’ve had quite a bit of trouble with our water supply: the three reservoirs serving the region were all heavily contaminated after a week-long storm. Thankfully, the reservoir serving my suburban neighbourhood was cleared within a day, but the main city was under a “boiled or bottled” advisory for two weeks (Vancouver’s tap water during this period was brown). Due to government and company caps, the price of bottled water was not allowed to increase according to its new supply and demand during this period. It was the perfect opportunity to study economic price theory in in action. As author Thomas Sowell puts it in my current reading material, Basic Economics: “Nothing shows the role of price fluctuations… like the absence of such price fluctuations.”
The situation in Vancouver sounded like an example right out of the book itself. The local reservoirs had been contaminated with dangerous levels of clay, residents were told to drink boiled or bottled water, and no one knew exactly how long the warning would last. This last part was key. The night the advisory was announced, shoppers began lining up at about two in the morning outside Costco for its ten o’clock opening. The pandemonium that followed the store’s opening was so tremendous it got a mention on the front page of The Vancouver Sun. In less than five minutes, Costco’s entire stock of bottled water was gone, and there were fights breaking out everywhere.
I didn’t think to save the article, so this isn’t confirmed, but I seem to recall that the major problem at the time was that whoever reached the bottled water first grabbed as much as they could carry, since they were so cheap and no one knew how long the advisory would be in effect. This is where price theory comes in. According to basic economic principles, the price of bottled water at Costco should have skyrocketed due to the sudden demand–but it didn’t, due to company restrictions (acting in reasonable social interests–if water was suddenly $10 a bottle, people would freak out), and therein lies the problem.
Consider this: what if the price of bottled water at Costco had skyrocketed to some wild price, like $10 a bottle? Would people have gone and grabbed three dozen bottles then? The official advisory, put out by the radio and newspapers, urged residents to drink their water “boiled or bottled.” If the price had skyrocketed, it’s likely that more people would have opted to boil their tap water instead of buy the obscenely-priced bottled water. Even if they had chosen to buy, they wouldn’t have done it in as large quantities as they would have at the cheaper prices. Whereas an individual may have bought three dozen bottles at $.50 or $1 each, they may only buy one dozen at $5 or $10 each, leaving more water for other people to claim. Escalating prices in a crisis aren’t intended to rob people blind; whether the customers realize it or not, the rising prices force them to share resources when there isn’t enough to go around. It keeps the balance, so no one leaves the store with three dozen bottles while someone else leaves with nothing.
By the way, as noted by Sowell, the high prices of hotel rooms after a crisis like a hurricane or earthquake are also an example of this forced generosity. By raising the prices of a hotel room to meet the sudden demand, the hotel forces many people to find roommates and families to rent single rooms to save money–effectively distributing their resource, shelter, among people who might have taken an entire room to themselves at normal prices. Privacy and space are sacrificed, but more people have a roof over their heads because of the higher cost of the rooms.
Anyone reading this with a background in economics would roll their eyes at these most basic ideas, I’m sure, but as a newbie to the field, I find it exciting to see the theories I read about in a book come to life in the “real world.” Of course, this is economics, so every principle acts in the real world, but seeing a theory I’ve been reading about take action around me is still very cool.
Price theory: forcing generosity, whenever you want it, and then some.