3. Scenario 3: A major hurricane knocks out electricity in Greensboro for days a

Question

3. Scenario 3: A major hurricane knocks out electricity in Greensboro for days a. What would you expect to happen in the market for electrical generators (like these: b. Now, what would happen if local officials in the affected areas ordered that https://goo.gl/gsitgQ) in the Greensboro area? generators could not sell for a price higher than the pre-hurricane price? What is this called? Using this example, which is better, letting the market determine the price, or having the government determine the price? Why? Explain the tradeoffs involved. c.

Explanation / Answer

3.
a. Because of interruption in power supply because of hurricane the demand for generator increases which increases the price for the limited supply.
b. Now in order to avoid the prices being increased the government uses price ceiling which control price increase
c. By regulating the price, the demand exceeds the supply which creates shortages leading to creation of black markets. So by letting the market to decide on the price the demand and supply would reach a new equilibrium level.

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