Managerial Economics & Business Strategy 8th Edition by Michael Baye,Jeff Prince

Exercise 4

Florida, like several other states, has passed a law that prohibits "price gouging" immediately before, during, or after the declaration of a state of emergency. Price gouging is defined as "… selling necessary commodities such as food, gas, ice, oil, and lumber at a price that grossly exceeds the average selling price for the 30 days prior to the emergency." Many consumers attempt to stock up on emergency supplies, such as bottled water, immediately before and after a hurricane or other natural disaster hits an area. Also, many supply shipments to retailers are interrupted during a natural disaster. Assuming that the law is strictly enforced, what are the economic effects of the price gouging statute? Explain carefully.