The Hurricane After Hugo: Price Ceilings "It’s disgraceful how some mice take advantage of others’ misfortune," complained Mouse Karl. "After hurricane Hugo smashed the east coast, sellers increased prices of ice, plywood, chain saws and other goods. Fortunately, government blocked the gouging by making it unlawful to raise prices after the hurricane." "But the hurricane did temporarily increase the scarcity of many products," answered Mouse Adam. "Supplies of many items fell at the same time demands for them rose. There were not enough products to satisfy all of every mouse’s increased wants, so somehow these items had to be rationed. How could mice most efficiently adapt to the disaster, making the best of a tragic situation? Unfortunately, government controls--which are costly to enforce--prevented higher prices from rationing the products to those willing and able to pay, so shortages resulted. The goods were then rationed by waiting in line." "A good thing, too," responded Karl, "for it is cruel to imply that a poor, unemployed mouse cannot receive immediate relief for her family because she does not have as much as a rich family." "But price controls are not an effective means for helping the poor," admonished Adam. "Remember, price controls create shortages and cause rationing by waiting in line. Is it not cruel to imply that a poor, elderly mouse in ill health cannot receive immediate relief because she does not have as much endurance as others to wait in line?" "Rationing by waiting in line does not guarantee poor mice a greater share of the pie," continued Adam. "Indeed, many mice will pay others to wait for them. If public officials were sensibly concerned about assuring the poor minimal access to goods in the marketplace, they would give the poor cash to supplement their buying power. Then, the entire community--not just suppliers of the purchased goods--would bear the cost of the subsidy." "Well, government price controls do keep goods cheaper during the emergency," remarked Karl. "They don’t even do that," answered Adam. "The real price of obtaining a good is its money price plus the value of time spent waiting in line. The price control keeps the money price lower. But by increasing the waiting time, it often raises the time cost by a greater amount. So when money and time are considered, the good is more costly than it would be if its money price could rise to its market level." "Moreover," Adam continued, "price controls make goods more expensive by reducing their availability. Without price controls, mice would have more incentive to transport greatly desired products into the devastated area." "Self-interest isn’t the only permissible reaction to the adversity," snapped Karl. "What about all those caring mice over the country who donate food and other valuable commodities?" "That is noble behavior which ought to be praised and encouraged," answered Adam. "But it doesn’t make sense to undo this charity by enacting price controls which further reduce already scarce supplies, make goods even more costly and divert time from cleaning up to waiting in line."
Questions for Thought and Discussion
1. How can price ceilings hold down prices of goods but increase their opportunity cost?