In the wake of Hurricane Katrina in the summer of 2005, much of the Gulf Coast had been pummeled by wind and inches upon inches of rain. Water was everywhere, but of- ten undrinkable. Basic provisions we take for granted, like drinking water, weren’t easy to come by and the Federal Emergency Management Agency (FEMA) was caught flat-footed.
In response to catastrophic events like a hurricane or an earthquake, the caricature of private industry is that firms will gouge customers. And sometimes this is true, but in response to Katrina, there was one unlikely hero: Walmart. In fact, the Mayor of Kenner, a suburb of New Orleans, had this to say about Walmart’s response: “. . . the only lifeline in Kenner was the Walmart stores. We didn’t have looting on a mass scale because Walmart showed up with food and water so our people could survive.”
Indeed, in the three weeks after Katrina, Walmart shipped almost 2,500 truckloads of supplies to storm- damaged areas. These truckloads reached affected areas before FEMA, whose troubles responding to the storm were so great that it shipped 30,000 pounds of ice to Maine instead of Mississippi. These stories and more are in Horwitz (2009), which summarizes the divergent responses to Katrina by private industry and FEMA. How was Walmart so effective in its response? Well, it maintains a hurricane response center of its own that rivals FEMA’s, and prior to the storm’s landfall it anticipated a need for generators, water, and food, so it effectively diverted supplies to the area. Walmart’s emergency re- sponse center was in full swing as the storm approached with 50 employees managing the response from headquarters.
This sounds like the sort of response FEMA should have produced; so if that’s the job of FEMA, why did Walmart respond so heroically? Simple economics. Walmart un- derstood that there would be an important shift of the demand curve for water, generators, and ice in response to the storm and the textbook response to such shifts is an increase in quantity supplied. Lucky for us, few are better at shipping provisions around the country than Walmart.
Daron Acemoglu, David Laibson, John List, Economics, 1st Edition, 2015
Added to diary 19 May 2018