Question

During a regional crisis (such as a bad hurricane) the government often makes it illegal to raise the price of emergency items, such as flashlights and bottled water. a) What gains from trade are lost by this government action? b) Will more or less flashlights be available in the hurricane area with the government price control? Why?

Answer 1

A.

The gains that could be achieved due to higher demand and subsequent higher price, will be lost due to the government action. It will happen, because government has applied price control upon the emergency items whose demand will increase during crisis. But, not able to raise the price, will cause losses of gain from the trade.

B.

Less flashlights will be available due to the price control, as suppliers will supply only that amount of these goods, that are to be supplied at a particular price. So, shortage in the market, takes place.

Some of the flashlights, will be sold in the black market and people will buy at higher prices from the black market, making losses to the government as well as the official traders.