Read: “In Praise of Price Gouging,” by John Stossel. Posted at Townhall.com, September 7, 2005.
Also, Read: “Dear Harvard Prof: Your $2,500 Ticket for ‘Hamilton’ Doesn’t Mean Price-gouging Is a Good Thing,” by Michael Hiltzik. Los Angeles Times, October 24, 2016.
a. Stossel begins with a (hypothetical) story of someone paying $20 for a bottle of water. Thinking about a supply and demand graph which would illustrate how the equilibrium price of a bottle of water might have risen, post-Katrina in New Orleans, from $1 to $20 a bottle (you might want to sketch one out for your self to help in your answer, does not need to be included in your response). Is the increase in price of a bottle of water a result of a change in demand, change in supply, or both? In the case of the Hamilton tickets, is the increase in the price of a ticket to $2,500 the result of a change in demand, change in supply, or both?
b. When the price of a bottle of water rises to $20, Stossel claims “water goes to those who really need it.” Do you agree? Use economic terms and concepts to explain why you think water does (or does not) therefore go to those who really need it.
Would your analysis be any different if you were analyzing the $2,500 ticket to Hamilton instead of bottles of water following a hurricane?
c. Laws against price gouging in the wake of a natural disaster might create a market disequilibrium.
What non-price mechanism to allocate the desired goods would you argue in favor of? What is your argument.
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