Question

Suppose that a hurricane shuts down much of the power grid in the coastal region of North Carolina and causes flooding and transportation issues after a late August hurricane.

a) What does this do to the demand and the supply of generators during and immediately after the hurricane?

b) What happens to the price and quantity of generators sold in the immediate aftermath of the hurricane if there are no anti-gouging laws? Will there be a surplus or a shortage?

c) What happens if anti-gouging laws place a binding price ceiling on generator prices.

d) Under which of the conditions (in (b) and (c) above would there be a deadweight loss? As part of your answer explain what deadweight loss is.

Answer 1

a) As the power supply will be interrupted the demand for the electricity generator will increase in the market. This will shift the aggregate demand to the right and the new equilibrium will be at a higher price and higher quantity.

b) The supply of the generators will be decreased in the market and that will increase the price of the generator and decrease the quantity in the market. If there is no anti gouging law in the market then there will be no shortage or surplus but the market will be in equilibrium.

c) If there is an anti gouging law in the market then the price will be set at a lower price and that will increase the demand and limit the supply causing a shortage in the market.

d) Conditions under the answer C will create a dead weight loss in the market and that will occur because the goods exchanged will decrease in the market due to price ceiling.