The entire discussion of government regulation in the economy is a source of controversy. However, the more standard debates about government regulation take on a more interesting twist when one considers the role of government price controls in disaster areas, such as the areas devastated by Hurricane Sandy. This sample economics paper explores government intervention following the disaster.
Government price controls following Hurricane Sandy
The article describes the effects of government price controls on the general goods and services market for the areas affected by Hurricane Sandy and price gouging after the disaster. Officials and lawmakers were concerned about potential price gouging by businesses of New York and New Jersey. Businesses are aware that consumers in their respective areas are in dire need of specific goods and services, due to the damages caused by the hurricane.
The need for such goods and services means that the elasticity for those particular products is extremely low. In other words, the demand for goods and services in the affected areas is actually quite inelastic. Sellers know that consumers do not have a lot of options in regards to the purchases of particular items. Buyers do not have the means to shop elsewhere.
Setting a reasonable price following localized disasters
The locations are struggling to bring power to their residents, meaning that phone and internet purchasing ability is low or nonexistent. In addition, consumers do not have the ability to shop at other store locations because many roads and other transportation routes such as trains etc. are closed down. The lack of viable options for consumers means they must shop at local stores, regardless of prices, which opens the doors for the price gouging the government is concerned about.
The article gives details on the price controls in place for both the New York and New Jersey areas. New York State law dictates that sellers are not allowed to charge an “unconscionably excessive price" for goods that are "vital and necessary" for consumers” (Powell, 2012). Many goods become vital and necessary in a disaster situation, and the law does not clearly define the meaning of an unconscionably excessive price.
State laws regulating price of goods
New Jersey State law is more clear with regards to what sellers actions sellers may not undertake. The law “makes it illegal for businesses to raise their prices more than 10 percent within 30 days of a declared state of emergency” (Powell, 2012). Both laws operate as price controls that protect the U.S. economy and consumer rights, especially during disaster situations.
More specifically, the laws represent price ceilings during the aftereffects of state emergencies. The ceiling is better defined under New Jersey State law, as it is illegal to raise prices by more than 10 percent in the current situation.
Price ceilings are implemented to prevent price gouging because sellers know that consumer demand is extremely inelastic during disasters. The government feels that by enacting a price ceiling during specific times, they are protecting the consumer from overpaying for necessary goods and services. Although policy maker’s intentions are well placed, the article details the negative effects price floors have on the general public.
Price floors and scarcity of goods
The major issue with price floors is that they cause a scarcity of the specific goods and services under their regulation. Sellers face serious fines for price gouging, which are meant to deter such actions and hopefully encourage them to provide their products at normal rates. The problem here is that without the increased prices, sellers simply do not bother bringing their goods and services to the area in need.
A noticeably high price, and thus demand for particular goods would normally draw sellers into that location. Disaster areas face abnormally high demand from consumers, and the higher prices from the demand should bring in additional sellers. Although prices rise, all demand is met, and every buyer with the necessary purchasing power is able to acquire the good or service in question. Price ceilings force sellers to charge normal prices in situations with abnormally high demand.
For example, the Hurricane Katrina disaster left many homeless and unable to care for themselves. Local businesses were not able to provide for victims due to damage or overwhelming demand. However, government price limits prevented consumers from bringing much-needed resources to the area. The areas affected by the storm required resources from the government and non-profits to make up for lost local business supplies.
The average level of prices means that additional sellers will not appear in the market and that existing sellers will not be more inclined to make sure their product is available in appropriate quantities. Price ceilings remove the regulating forces of a normal function market. The increased demand is not met with the expected increase in supply, creating a shortage.
Rationing of goods and price limits during disasters
Additional issues arise with the rationing of goods under emergency situations. The shortage of goods means that demand cannot be properly satisfied, leading to rationing. Consumers cannot use monetary power to reflect their need for goods and services. Long lines for goods and services are inefficient and force consumers to waste time because of their need for the particular item. In the worst cases, consumers wait in line only to discover that the ration for the good has run out. The consumer has wasted their time waiting in line for no gain, cause further inefficiencies in the market.
References
Powell, B. (2012). A government imposed disaster: Price controls in the wake of sandy. The Huffington Post, Retrieved from http://www.huffingtonpost.com/ben-powell/a-government-imposed-disa_b_2077734.html