Microeconomics
Problem Set #3
Price Controls After a Storm
In 2014, a major ice storm hit the southeastern U.S. The storm
ought down power lines and trees, cutting electricity in many
areas, making travel difficult, and slowing down repair crews.
Heating homes became a major challenge. The storm created
shortages of power generators. As a result, those products sold at
prices much higher than normal. These high prices provoked cries of
“price gouging” and calls on the government to impose price controls
to prevent gouging. While no one likes to pay a higher price than
normal for something, consider what would have happened with a
price ceiling. The economic intuition is revealing.
Draw a diagram showing the market for generators with an
equili
ium price at $250. Now impose a price ceiling at $200 per
generator. What would be the impact of the price ceiling on the
quantity demanded? On the quantity supplied? Who would benefit
from the price ceiling and who would be harmed? Let the graph guide
your thinking. Don’t start with your gut reaction! Did the price
ceiling help the people it was designed to help? Explain the economic
easoning behind your analysis.