Producers were accused of price gouging as the price of bottled water soared after Hurricane Andrew. Consumers clamored for price controls to keep bottled water at pre-Andrew levels. Use supply and demand analysis to graphically show the effect of setting a price ceiling on bottled water after Hurricane Andrew at the pre-hurricane equilibrium price. Use your graph to assist in explaining the likely unintended effects of such a price control. Be sure that your graph is completely and correctly labeled.
What will be an ideal response?
As a result of contaminated public water, consumers substituted bottled water, increasing the demand for bottled water (Figure 4-25). If the market is unfettered, equilibrium price and quantity will increase, assuming supply is unchanged. Holding price at pre-Andrew levels would cause a shortage, as quantity supplied would be unchanged from pre-Andrew levels while demand increased. Unintended side effects would include long lines for bottled water and black markets where bottled water would be sold for far more than the legislated price.
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