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Friday, October 21, 2005

Price Gouging, Rational Expectations, and the Long-Run Supply Curve

What if people anticipate a sudden shortage might occur in a particular area? In the expectation of earning profits, they will gear up to ship more of the product into that area. And that is exactly what has happened in most hurricane-threatened areas. From Brian Ferguson at the Canadian Econoview, quoting the Miami Herald re: Wilma (reg req'd):

Local hardware and other stores say they are well stocked with supplies should Wilma come to South Florida. ''We are ready to go,'' said Home Depot spokesman Don Harrison. ``We've reactivated our war room here in Atlanta.''He said stores in this region are well stocked with plywood, generators, chain saws, tarps and other items needed before and after storms.

Brian Ferguson astutely adds about price gouging laws,

...assuming all of the hardware stores in South Florida are bringing in storm supplies, the supply curve has shifted out to the right in anticipation of an increase in demand and competition between local suppliers would keep prices from rising too much. So the price freeze actually might not be that much of a distortion.

Let's hear it for rational expectations models!

Posted by EclectEcon on October 21, 2005 | Permalink


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The price freeze might keep prices artificially high for that matter. All dealers are aware of exactly what the price amount is under the freeze. Even if they have a large supply of something, they may not want to be the first to lower the price to sell more of them, if it means triggering a price war. The price freeze may have the totally perverse effect of keeping prices higher, just when people need more of an item. Supply and demand work.

Posted by: Raging Ranter | 2005-10-21 10:28:08 PM

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