H2O-ver Priced?

Despite what pandering politicians may try to convince voters of, the realities of economics are not escapable — particularly the less desirable ones. No amount of wishful thinking or government-imposed mandates on economic behavior can get past certain facts.

Case in point is the reaction of local politicians to the economic fallout from the recent water line break in the Boston area. After the area tap water was deemed initially (and apparently incorrectly) to be contaminated, Massachusetts Governor Deval Patrick declared a state of emergency and ordered residents to boil their water before using it. The natural result of this inconvenience was a surge in the demand for bottled water. Reacting to the increased demand, stores increased the price of bottled water, much to the dismay of some residents and politicians.

The Massachusetts Attorney General’s office, reacting to reports of jacked-up water prices, issued a press release asking for residents to report (via a special hotline) suspected incidents of “price-gouging” — a term seldom clearly defined when used. Attorney General Martha Coakley asserted the following:

Businesses and individuals cannot and should not take advantage of this public emergency to unfairly charge consumers far beyond what they would typically charge for water … We encourage consumers to report instances in which they believe that the price of water has been sharply raised to take advantage of the water emergency, and we are prepared to take appropriate legal action if necessary.

She failed to account for the fact that “typically” the entire area’s tap water supply isn’t contaminated from a pipe break. That unfortunate but significant fact naturally changes the economic reality — again, a reality politicians would all-too-often rather not come to terms with.

Economics 101 tells you that when supply of a needed good (like clean water) goes down, that good becomes more valuable. Connected with that is the other generality that when demand for a particular good (like bottled water) goes up, the price will also go up. It is the balance between supply and demand that keeps things relatively stable. Dramatic shifts in that balance lead to incidents like the so-called “price-gouging” in Boston.

These same incidents are ripe for political rhetoric and grandstanding in the name of protecting the consumer from businesses who are believed to be “unfairly” taking advantage of them. What these businesses are really doing is simply reacting to the shift in supply and demand. By raising the price, those not in immediate need of the product are discouraged from hording it to the detriment of those in greater need. Not doing this would lead to shortages and inefficient use (and over consumption) of the product by consumers — leaving people who desperately need the product without the means to purchase it. Arbitrary price controls, which are what the politicians in these situations often propose, necessarily lead to even more shortages and long waiting lines (the prime example being the oil price controls practiced by the U.S. government in the 1970s).

It’s the supply-and-demand-generated price of any given product that allows consumers to weigh the costs and benefits of purchasing it instead of using their money for some other purpose. When politicians meddle in the market, they distort this rational decision-making process in exchange for an arbitrary political decision not necessarily always made in the best interest of individuals in the market.

Too often, politicians use such interventions as means to gain popular support, and eventual reelection, from voters ignorant of economics. This Boston water incident is just another unfortunate example of that.

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