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.
Transcribed Image Text:Hurricane "Fran" smashed into the North Carolina coastline at Cape Fear at about 8:30 pm, 5 September 1996. It was a category 3, with 120 mph winds, and enormous rain bands. It ran nearly due north, hitting the state capital of Raleigh about 3 am, and moving north and east out of the state by moming. The storm also dropped as much as ten inches of rain. In some counties, nearly every building was damaged; total reconstruction cost and damages were later calculated at $5 billion (2006 $). In the Triangle (Raleigh, Durham, and Chapel Hill), more than a million people were without power the next morming. Humidity made everything sticky. Hundreds of homes had roofs damaged 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 freezers started to go bad. Insulin, baby formula, and other necessities immediately became susceptible to spoilage in the 92+ degree heat. The damage was so widespread, and communication so sketchy, that no one had any fim idea of when 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 the storm, would load trucks and head to the disaster area. After all, they owned, or could obtain, all the 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 Carolina had 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 price increases to around 5% or less. Each instance of violation of this law could result in a fine of up to $5,000. So, ice that happened in Charlotte, stayed in Charlotte. Why drive three hours to Ralcigh when you can only charge the Charlotte price, plus just enough for gas money to break even? The problem for Raleigh residents was all about price, at that point. The prices of all the necessities that I wanted to use to "preserve, protect, or sustain" my own life shot up to infinity. Within a day after the storm, there were no generators, ice, or chain saws to be had, none. But that means that anyone 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 of Raleigh and largely untouched by the storm, noticed that the freezers at the Circle P's, the Stop Marts, 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, and a shortage in Raleigh. These young men rented two small freezer trucks, paid $1.70 cach for 500 bags 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 bad human beings, real jerks. But who cares? If there had been a benevolent, omniscient social planner, she would have been yelling: (1) Raleigh is desperate for ice. (2) If you have ice, take it to Raleigh. Of course, there could never be a social planner with that level of information and authority, as Hayek (1945) argued so persuasively. But these yahoos acted as if they heard one
Transcribed Image Text: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 have chain saws, big ones. They rolled the cut logs off the road so their trucks (and, by the way, other cars 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 almost no one refused to pay for the ice. I have also been told that the sellers limited purchases to 4, or 6, bags per customer, but I'm not sure. If it is true, it reflects the altruism of the native North Carolinian, 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 up to the Five Points truck after about an hour. The officers talked to the sellers, talked to some buyers, 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 arrested the yahoos. Apparently the truck was then driven to the police impoundment lot in downtown Raleigh, as evidence. The ice may or may not have melted (accounts vary), but it certainly was not given out to citizens. And now we are back to where I started: the citizens, the prospective buyers being denied a chance to buy ice... they clapped. Clapped, cheered, and hooted, as the vicious ice sellers were handcuffed 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 they clapped as the police, at gunpoint, took that opportunity away from them.

Question

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, 5
September 1996. It was a category 3, with 120 mph winds, and enormous rain bands. It ran nearly
due north, hitting the state capital of Raleigh about 3 am, and moving north and east out of the
state by moming. The storm also dropped as much as ten inches of rain. In some counties, nearly
every building was damaged; total reconstruction cost and damages were later calculated at $5
billion (2006 $).
In the Triangle (Raleigh, Durham, and Chapel Hill), more than a million people were without
power the next morming. Humidity made everything sticky. Hundreds of homes had roofs
damaged 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 freezers
started to go bad. Insulin, baby formula, and other necessities immediately became susceptible to
spoilage in the 92+ degree heat.
The damage was so widespread, and communication so sketchy, that no one had any fim idea of
when 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 the
storm, would load trucks and head to the disaster area. After all, they owned, or could obtain, all
the 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 Carolina
had 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 price
increases to around 5% or less. Each instance of violation of this law could result in a fine of up
to $5,000. So, ice that happened in Charlotte, stayed in Charlotte. Why drive three hours to
Ralcigh when you can only charge the Charlotte price, plus just enough for gas money to break
even?
The problem for Raleigh residents was all about price, at that point. The prices of all the necessities
that I wanted to use to "preserve, protect, or sustain" my own life shot up to infinity. Within a day
after the storm, there were no generators, ice, or chain saws to be had, none. But that means that
anyone 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 of
Raleigh and largely untouched by the storm, noticed that the freezers at the Circle P's, the Stop
Marts, 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, and
a shortage in Raleigh. These young men rented two small freezer trucks, paid $1.70 cach for 500
bags 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 bad
human beings, real jerks. But who cares? If there had been a benevolent, omniscient social
planner, she would have been yelling: (1) Raleigh is desperate for ice. (2) If you have ice, take it
to Raleigh. Of course, there could never be a social planner with that level of information and
authority, 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 have
chain saws, big ones. They rolled the cut logs off the road so their trucks (and, by the way, other
cars 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 almost
no one refused to pay for the ice. I have also been told that the sellers limited purchases to 4, or
6, bags per customer, but I'm not sure. If it is true, it reflects the altruism of the native North
Carolinian, 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 up
to the Five Points truck after about an hour. The officers talked to the sellers, talked to some
buyers, 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 arrested
the yahoos.
Apparently the truck was then driven to the police impoundment lot in downtown Raleigh, as
evidence. The ice may or may not have melted (accounts vary), but it certainly was not given out
to citizens.
And now we are back to where I started: the citizens, the prospective buyers being denied a chance
to buy ice... they clapped. Clapped, cheered, and hooted, as the vicious ice sellers were
handcuffed 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 they
clapped as the police, at gunpoint, took that opportunity away from them.

Accepted Answer

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