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Lecture_Note_Set_5_Disaster_Relief - Chapter 5 An...

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Chapter 5 An Application of Supply and Demand Analysis to Disaster Relief Preparation. The ideas introduced and discussed in this lecture note are Ceiling prices. Floor prices. Black markets. Rationing. Queuing ( i.e. waiting in line). Allocating scarce resources in a competitive market. Allocating scarce resources by regulations. You should use the index of your textbook to review what your book has to say on these subjects before you come to class. Motivation. In the United States many markets are regulated. Each regulation is intended to benefit somebody; e.g. an import tariff regulation that reduces the quantity imported of some foreign-produced commodity is often (wrongly) touted as a regulation that “will save American jobs from being exported overseas.” The members of the U.S. Congress are constantly assailed by lobbyists seeking either the imposition of a regulation that will benefit their clients or the removal of a regulation that inflicts costs upon their clients. How should a regulation be assessed? When should it be imposed, and when not? At the least any such assessment should consider carefully not just the immediate and direct effects of a regulation but also the more 97
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98 CHAPTER 5. DISASTER RELIEF subtle and pervasive indirect consequences that come from the effects a regulation has on the market(s) upon which it is imposed. The regulation examined in this note is a ceiling price. This is a price that by law cannot be exceeded. So if, for example, the price of gasoline rises to about $4 per gallon it is likely that some people will ask the U.S. Government to pass a law that lowers the maximum allowed (legal) market price for gasoline, perhaps to only $3 · 50 per gallon. The idea, of course, is to make things better for consumers. After all, isn’t it obvious that a lower price for a commodity must benefit consumers? Well, don’t be too hasty to jump to that conclusion. The particular case examined is the effect of ceiling prices that were imposed after the huge Hurricane Hugo that slammed into the coast of South Carolina in 1989. Ceiling Prices, Floor Prices and Black Markets. A CEILING PRICE is N A FLOOR PRICE is N Whenever a commodity is bought and sold at a price higher than a ceiling price or lower than a floor price, that trade is illegal and is called BLACK . The price at which such an illegal trade is made is called a BLACK MARKET PRICE . A well-known example of a federally mandated US floor price is N In several countries the prices received by growers of some agricultural products are not permitted to fall below legislated levels. These agricultural “support prices” are also examples of floor prices. A well-known example of a locally mandated ceiling price is N The particular example that will be examined in detail here is the use of ceil- ing prices to regulate markets for essential commodities immediately following the enormous damage inflicted upon South Carolina following Hurricane Hugo.
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Lecture_Note_Set_5_Disaster_Relief - Chapter 5 An...

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