What would have been the effect on social welfare

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In 1993, the Mississippi River flooded, causing widespread devastation and leaving Midwesterners desperate to acquire basic necessities such as food and ice (for food storage). Profiteers soon emerged, selling ice for as much as $50 per pound. Editorialists and politicians decried this price-gouging and called for an end to do it.

a. Suppose that the authorities had effectively prohibited price-gouging. What would have been the effect on the amount of ice brought into the affected area?

b. Suppose that the authorities had effectively prohibited price-gouging and somehow managed to ensure that their action had no effect on the quantity of ice in the area. What would have been the effect on social welfare?

c. Suppose that a pure altruist in the affected area had come into possession of a small amount of ice. Explain why he might have charged $50 per pound for it, even if he was completely unconcerned with his own welfare.

d. Do you think it would have been a good idea to prohibit price-gouging?

Reference no: EM13154495

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