After Hurricane Andrew hit Florida and Louisiana, consumers expressed outrage at

Question

After Hurricane Andrew hit Florida and Louisiana, consumers expressed outrage at the high prices being charged for chainsaws, generators, and bottled water. A) If governments followed the consumers' demands and imposed price ceilings in these markets, what is the likely result? B) In your answer, define price ceiling and explain its consequences for the prices being charges for those goods, C) Use your graph to assist in explaining the likely unintended effects of such a price control. Be sure that your graph is completely and correctly labeled.

Explanation / Answer

Effective price ceilings (i.e., price ceilings set below the equilibrium price) will cause a chronic shortage of the goods, leading to black markets, greater profits for illicit suppliers, and (probably) higher prices than would exist in a free market. Additionally, the quantities supplied of these goods will be lower than in a free market, making people worse off than they otherwise would be.

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