Question

during a crisis such as hurricane sandy, governments often make it illegal to raise the price of emergency items like flashlights and bottled water. In practice, this means that these items get sold on a first-come/first-served basis.

a. if a person has a flashlight that she values at $5, but its price on the black market is $40, what gains from trade are lost if the government shuts down the black market?

b. why might a person want to sell a flashlight for $40 during an emergency?

c. why might a person be willing to pay $40 for a flashlight during an emergency?

d. when will entrepreneurs be more likely to fill up their pickup trucks with flashlights and drive into a disaster area: when they can sell their flashlights for $5 each or when they can sell them for $40 each?

Answer 1

A)

In this case if trade is allowed then the total gain is $35. This gain from trade usually split between buyer and seller based on the price they have agreed between them.

B)

In this case we can’t find the exact reason because there many reason for this. In this case the person have another flash lights, or he may have candles with him, or he may use the money to buy water, etc.

C)

A person needs flashlights at higher price because they don’t have the other substitution. He may not have candles or other lights to visits his neighbour or may have another reason.

D)

The price is $40, then definitely the entrepreneur travels the disaster area using the pickup with full of flashlights.