Question

What happens to the market for generators in areas hit by a hurricane when the price gouging law is binding? What is the unintended consequence of this law?
In Spring 2020, there were reports of individuals buying up all the hand sanitizer and then trying to sell it for a very high price on Amazon. How is the experience in 2020 different than the one with a hurricane. Briefly explain

Farm Aid programs can ensure that prices to agricultural producers stay high. Why would we want prices to stay high? What is the difference between a farm aid program that mandates that consumers pay a high price versus one where the government provides insurance to producers if the prices are lower? Briefly explain using the concepts of price control and efficiency.  

Answer 1

1. In areas hit by hurricanes and facing power outage, demand for generators increases drastically.

As a result, demand curve for generators shifts to the right, leading to a huge increase in the price of generators.

However, with price gouging laws in action, the government prohibits increase in prices by more than say 10%

With this in action, price of generators would not increase and remain below the new equilibrium price

As a result, at the new binding price, quantity demanded of generators would exceed quantity supplied, leading to shortage of genetators in the market .

2. In 2020, resale of hand sanitizers was allowed which led to multiple increase in price of hand sanitizes, however during the hurricane in the past, due to price gouging law, increase in price was not allowed, which made resale not beneficial and thus was not pursued by people.

3. Farm prices to producers were intended to stay high in order to incentivize them to continue producing those goods and not get discouraged by lower market price. It is like a support price offered to the farmers.

In programs where consumers pay high price, market price of the product rises leading to inflation. However, in case of government paying the farmers, the market price of the product remains unchanged and so does inflation. This is like a price control program which keeps market price unchanged while increasing producer income.