Scenario: The figure on the left shows the demand for fuel by Lisa and Nick during ordinary times. Assume that Lisa and Nick are the only consumers. In the figure on the right, D₀ is the market demand, and S₀ is the supply in ordinary times in the town. Then a hurricane hits the town. The acute needs for fuel to operate electric generators pushes the demand to D₁. Meanwhile, the supply plummets to S₁ because some of the fuel storage tanks owned by the town seller have been damaged by the storm. This pushes the price up to $5 per liter and only Lisa can afford some fuel. Suppose that fuel sellers outside the affected area have a cost of production such that MC = ATC at $2.50 per liter, which includes the cost of transporting the fuel under hazardous conditions.

-Refer to the scenario above.Suppose that,in addition to an anti price gouging law prohibiting private sellers to sell fuel in town at price above $1.75,the town council decided to buy the fuel from private sellers at $1.75,using the tax revenue,so the council can distribute it to Lisa and Nick.Will this government action alleviate the situation?
A) Yes. There will be a surplus.
B) Yes. The council will be able to meet the demand from Lisa and Nick.
C) No. There will still be a shortage.
D) No. The council will turn around and charge $5.00 to Lisa and Nick.

Question

Scenario: The figure on the left shows the demand for fuel by Lisa and Nick during ordinary times. Assume that Lisa and Nick are the only consumers. In the figure on the right, D₀ is the market demand, and S₀ is the supply in ordinary times in the town. Then a hurricane hits the town. The acute needs for fuel to operate electric generators pushes the demand to D₁. Meanwhile, the supply plummets to S₁ because some of the fuel storage tanks owned by the town seller have been damaged by the storm. This pushes the price up to $5 per liter and only Lisa can afford some fuel. Suppose that fuel sellers outside the affected area have a cost of production such that MC = ATC at $2.50 per liter, which includes the cost of transporting the fuel under hazardous conditions.
 
-Refer to the scenario above.Suppose that,in addition to an anti price gouging law prohibiting private sellers to sell fuel in town at price above $1.75,the town council decided to buy the fuel from private sellers at $1.75,using the tax revenue,so the council can distribute it to Lisa and Nick.Will this government action alleviate the situation?
A) Yes. There will be a surplus. 
B) Yes. The council will be able to meet the demand from Lisa and Nick. 
C) No. There will still be a shortage. 
D) No. The council will turn around and charge $5.00 to Lisa and Nick.

Quizplus · Accepted Answer

The government action may help Lisa and Nick to afford fuel at a lower price of $1.75 per liter, but it will not increase the supply of fuel in the market. As a result, there will still be a shortage because the demand is higher than the supply at that price. The only way to increase the supply and alleviate the situation is by repairing the damaged fuel storage tanks or importing fuel from outside the affected area.

Scenario: the Figure on the Left Shows the Demand for Fuel