Just like clockwork: first the natural disaster (Andrew, Hugo, or in this case, Charley) or major event (Super Bowl, Sugar Bowl, World Series), then the usual nonsense about the evils of price gouging. Fortunately, yesterday’s Daily Article provides a potent antidote (Don Boudreaux has an excellent post at Cafe Hayek).
The furor over “price gouging” is enough to make economists want to cry, but it’s a good “teaching moment:” the anti-price gouging hysteria teaches us one of the most fundamental principles of economics. Specifically, interfering with market prices invariably produces the exact opposite of what the well-intentioned price-setter wishes to achieve. Price controls generate shortages and unlawful behavior.
As much as we might chafe at the thought of someone charging $10 for a bag of ice, changes in relative prices send important signals to consumers (in this case, conserve scarce resources) and to producers (again in this case, produce more milk, ice, and plywood for the Florida market).
Below are some questions from old exams dealing with price controls, adapted from chapters 5 & 6 of Heyne, Boettke, and Prychitko’s The Economic Way of Thinking and, in some cases, taken from the pages of the Birmingham News and the Washington University Student Life.
Talladega Superspeedway, which holds almost 200,000 spectators, is in the tiny town of Talladega, Alabama.
- (3 points) On the weekend of the big race, hotel rooms in Talladega rent for $300 per night. On non-race weekends, they rent for $50 per night. Why?
- (4 points) What happens if the Talladega City Council imposes an “anti-gouging” ordinance that caps the price of rooms at $50 per night?
A tornado blows through Saint Louis and destroys windows throughout the city, causing the price of new windows to skyrocket. A coalition of community leaders has asked that the city place a price cap on new windows because, in the words of the coalition, “they shouldn’t be allowed to charge more than their costs.” Using what you’ve learned this semester, answer the following:
- a. Why are window makers likely to raise their prices?
- b. What concept of “costs” does the coalition have in mind?
- c. How will rising prices actually make more windows available to the community?
- d. What might local window makers do to increase prices without angering the coalition?
Suppose the Super Bowl will be held in Saint Louis this season. Use appropriate diagrams to answer the following (5 points each, 25 points total).
- a. On the weekend of the big game, people expect hotel rooms in Saint Louis to rent for $500 per night. On non-game weekends, they rent for $100 per night. Why?
- b. What will happen to the availability of hotel rooms if the St. Louis City Council imposes an “anti-gouging” ordinance that caps the price of rooms at $100 per night?
- c. Does this make people better off or worse off? Why or why not?
- d. How might hotel owners and hotel buyers fix the problem the ordinance causes?
- e. How might other St. Louisans help solve the problem?
