What is the effect of the price gouging law (effectively a price control) on prices in the market for ice in Raleigh after the storm? Illustrate with the use of an appropriate figure, particularly in comparison to what price and quantity traded would be in a competitive market without such laws.Requirements:Able to precisely identify the economic concept for explaining price gouging laws, with the appropriate use of a figure and description of outcomes relative to the competitive benchmark. Hurricane "Fran" smashed into the North Carolina coastline at Cape Fear at about 8:30 pm, 5September 1996. It was a category 3, with 120 mph winds, and enormous rain bands. It ran nearlydue north, hitting the state capital of Raleigh about 3 am, and moving north and east out of thestate by moming. The storm also dropped as much as ten inches of rain. In some counties, nearlyevery building was damaged; total reconstruction cost and damages were later calculated at $5billion (2006 $).In the Triangle (Raleigh, Durham, and Chapel Hill), more than a million people were withoutpower the next morming. Humidity made everything sticky. Hundreds of homes had roofsdamaged by falling pines and powerful winds. Few residences had any kind of back-up power.Many roads were blocked by large fallen trees. Within hours, food in refrigerators and freezersstarted to go bad. Insulin, baby formula, and other necessities immediately became susceptible tospoilage in the 92+ degree heat.The damage was so widespread, and communication so sketchy, that no one had any fim idea ofwhen power would be restored. More than a million people needed ice. And they needed it now.One might think that thousands of entrepreneurs in the surrounding areas, little touched by thestorm, would load trucks and head to the disaster area. After all, they owned, or could obtain, allthe things that the residents of central North Carolina needed so desperately. Ice, chain saws,generators, lumber, tarps for covering gaping holes in roofs... we needed it all...But no such mass movement of resources to their highest valued use took place. North Carolinahad an "anti-gouging law," which made it illegal to sell anything useful at a price that was"unreasonably excessive under the circumstances." This had been widely interpreted to limit priceincreases to around 5% or less. Each instance of violation of this law could result in a fine of upto $5,000. So, ice that happened in Charlotte, stayed in Charlotte. Why drive three hours toRalcigh when you can only charge the Charlotte price, plus just enough for gas money to breakeven?The problem for Raleigh residents was all about price, at that point. The prices of all the necessitiesthat I wanted to use to "preserve, protect, or sustain" my own life shot up to infinity. Within a dayafter the storm, there were no generators, ice, or chain saws to be had, none. But that means thatanyone who brought these commodities into the crippled city, and charged less than infinity,would be doing us a service.Some service was, in fact, on the way. Four young men in the town of Goldsboro, an hour cast ofRaleigh and largely untouched by the storm, noticed that the freezers at the Circle P's, the StopMarts, and the Handee Sluggos were brimming with ice. Convenience stores had stocked up,expecting a more easterly course for the storm. Now, there was an ice surplus in Goldsboro, anda shortage in Raleigh. These young men rented two small freezer trucks, paid $1.70 cach for 500bags of ice for cach truck and set off, filled with a sense of charity and the public good.Okay, I made that last part up. They were filled with a sense of greed. They may have been badhuman beings, real jerks. But who cares? If there had been a benevolent, omniscient socialplanner, she would have been yelling: (1) Raleigh is desperate for ice. (2) If you have ice, take itto Raleigh. Of course, there could never be a social planner with that level of information andauthority, as Hayek (1945) argued so persuasively. But these yahoos acted as if they heard one anyway, speaking through the price system: cheap ice in Goldsboro was expensive ice in Raleigh,so they could make money.Ouricemen came to the outskirts of Ralcigh, and headed for the interior, where the citizens waited,icelessly. The path was blocked by fallen trees, but these were yahoos, not idiots. Yahoos havechain saws, big ones. They rolled the cut logs off the road so their trucks (and, by the way, othercars and emergency vehicles) could pass.... I have not been able to find a definitive claim about price, but it was more than $8.On reaching the front of the line, some customers were angry that the price was so high, but almostno one refused to pay for the ice. I have also been told that the sellers limited purchases to 4, or6, bags per customer, but I'm not sure. If it is true, it reflects the altruism of the native NorthCarolinian, even ones who are just trying to make a buck.But the police are charged with upholding the law, even the dumb ones (laws, not police).Someone must have made a call, because two Ralcigh police cars and an unmarked car pulled upto the Five Points truck after about an hour. The officers talked to the sellers, talked to somebuyers, still holding their ice, and confirmed that the price was much higher than the "correct"price of $1.75 (the cost of a bag of ice before the storm). The officers did their duty, and arrestedthe yahoos.Apparently the truck was then driven to the police impoundment lot in downtown Raleigh, asevidence. The ice may or may not have melted (accounts vary), but it certainly was not given outto citizens.And now we are back to where I started: the citizens, the prospective buyers being denied a chanceto buy ice... they clapped. Clapped, cheered, and hooted, as the vicious ice sellers werehandcuffed and arrested. Some of thosce buyers had been standing in line for five minutes or more,and had been ready to pay 4 times as much as the maximum price the state would allow. And theyclapped as the police, at gunpoint, took that opportunity away from them.

According to the passage, the anti-gouging law was a low that made illegal to sell any useful…

Answered: What is the effect of the price gouging…

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC