Question

Anti-price gouging laws refer to statues that prevent the sale of commodities following an emergency, such as a natural disaster, at prices higher than prevailed before the emergency. Using economic analysis, demonstrate the effects of anti-price gouging laws. Your answer should include a graph.

Answer 1

Price gouging is the practice of raising the price of goods unnecessarily high by reducing the supply which may also happen without deliberation such as at times of natural disasters. Now when there are anti-price gouging laws. they would prevent the sale of commodities at prices higher than prices prevailing before such disaster. Since supply is reduced, supply curve shifts left, raising the market price to P1. But the price is not allowed to rise beyond P0, there will be a shortage of such good shown by Q2Q0.

This would result in long queues where people would wait for their turn to get the rationed goods. Black market can emerge where consumers who are able to get some quantity, sell to other consumers with higher willingness to pay at a much higher price.