The article describes the effects of government price controls on the general goods and services market for the areas affected by Hurricane Sandy. 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. 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. 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). Regardless of clarity, both laws operate as price controls, 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 the policy maker’s intentions are well placed, the article details the negative effects price floors have on the general public. These effects were also felt in the aftermath of Hurricane Katrina.
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 the 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. The average level for 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 functioning market. The increased demand is not met with the expected increase in supply, creating a shortage.
Additional issues arise with the rationing of goods under emergency situations where consumers lacked preparation. 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. The result is long lines as consumers must wait for their chance at the desired item. 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.
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