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Hurricane Andrew in Florida and Louisiana Discussion

Hurricane Andrew in Florida and Louisiana Discussion


1. Price Ceilings After Hurricane Andrew: If governments impose price ceilings on goods like chainsaws, generators, and bottled water after Hurricane Andrew, the likely result would be shortages and inefficiencies in the market. Price ceilings set below the equilibrium price, which is the market-clearing price, create a situation where the quantity demanded exceeds the quantity supplied. In this case:

  • Shortages: The high demand for these goods after a disaster would lead to shortages. Sellers might not be willing to supply these goods at the artificially low prices set by the government, leading to empty store shelves.
  • Black Markets: Shortages can give rise to black markets, where goods are sold at higher prices illegally. Consumers might be forced to pay even more than they would have if the prices were allowed to adjust naturally.
  • Inefficient Allocation: With artificially low prices, demand would remain high, but supply would be limited. This means that some consumers who value the goods more would miss out, while those who can buy them might not necessarily be the ones who need them the most.
  • Quality Decline: Suppliers might cut corners on quality due to the price limitations, as they might not be able to cover their costs with the capped prices.

2. Economy Not Self-Correcting Out of a Recessionary Gap: The economy might not always self-correct out of a recessionary gap due to various factors, including:

  • Sticky Prices and Wages: Prices and wages in the real world are often slow to adjust downwards. During a recession, businesses might be hesitant to reduce wages, and many contracts have fixed prices. This leads to a decrease in consumer spending and aggregate demand.
  • Lack of Confidence: Economic downturns can lead to a lack of consumer and business confidence. This can result in decreased spending and investment, further exacerbating the recession.
  • Financial System Instabilities: If there are issues in the financial system, such as a banking crisis or credit crunch, it can limit the availability of credit for businesses and consumers, hindering economic recovery.
  • Global Economic Conditions: Economic conditions in other countries can impact a nation’s exports and imports, affecting its overall economic performance.

3. Government and Efficient Mosquito Eradication Programs: Government involvement is often necessary for efficient mosquito eradication programs because of the characteristics of public goods and externalities associated with mosquito control:

  • Externalities: Mosquito control benefits not only the individuals who undertake it but also the entire community. This positive externality can lead to under-provision of mosquito control by private firms, as they might not capture the full social benefit.
  • Public Goods: Mosquito control can be considered a public good since its benefits are non-excludable (people can’t be easily excluded from its benefits) and non-rivalrous (one person’s use doesn’t diminish its availability to others). This makes it difficult for private firms to charge individuals for the service, potentially resulting in under-provision.
  • Coordination and Scale: Efficient mosquito eradication often requires coordinated efforts across a wide area. Government agencies can pool resources, coordinate activities, and ensure comprehensive coverage that might be challenging for private firms.

4. Calculating Unemployment Rate and Types of Unemployment: The unemployment rate is calculated as the number of unemployed individuals divided by the labor force (the sum of employed and unemployed individuals), expressed as a percentage.

Three principal types of unemployment are:

  • Frictional Unemployment: This type of unemployment occurs when individuals are temporarily between jobs or entering the labor market for the first time. It’s a natural part of the job search process and often short-term.
  • Structural Unemployment: Structural unemployment arises from a mismatch between the skills and qualifications of workers and the requirements of available jobs. Changes in technology, shifts in industries, or changes in consumer preferences can lead to structural unemployment.
  • Cyclical Unemployment: This type of unemployment is caused by fluctuations in the business cycle. During economic downturns (recessions), firms might cut back on production, leading to layoffs and increased unemployment. As the economy recovers, this type of unemployment decreases.

5. Public Goods and Summer Concert Performances: Summer concert performances in public parks can be considered public goods. A public good has two key characteristics: non-excludability and non-rivalry. In this context:

  • Non-Excludability: Once the performance is provided, it’s difficult to exclude anyone from enjoying it. People can’t be easily charged or prevented from listening to the music.
  • Non-Rivalry: One person’s enjoyment of the music doesn’t diminish its availability for others. Multiple people can enjoy the music simultaneously without affecting others’ enjoyment.

Since public goods suffer from the free-rider problem (people benefiting without paying), an admission charge can be seen as an attempt to make the provision more efficient. By charging an admission fee, the costs of organizing the concert can be covered, ensuring that the event can continue to be provided. However, there’s a delicate balance, as charging an admission fee might reduce the inclusivity and accessibility of the event.

6. Allocative Efficiency and Pollution: a. The price for the pine oil cleaner is unlikely to be allocatively efficient. Allocative efficiency occurs when the price of a good reflects its true social cost and benefit. In this case, the price of the cleaner does not account for the external cost it imposes on nearby houses by discoloring their paint.

b. An appropriate government policy to correct the problem could be imposing a tax or a fine on the emissions produced by SouthState Chemical Co. This tax would internalize the external cost of pollution, making the price of the cleaner more accurately reflect its true societal cost. Alternatively, the government could set emissions standards and require the company to invest in cleaner production technologies to reduce or eliminate the harmful emissions.

Hurricane Andrew in Florida and Louisiana Discussion



After Hurricane Andrew hit Florida and Louisiana, consumers expressed outrage at the high prices being charged for chainsaws, generators, and bottled water. If governments followed the consumers’ demands and imposed price ceilings in these markets, what is the likely result?

Why i Why is it possible that the economy will not self-correct out of a recessionary gap

Explain why government, rather than private firms, is required for efficient mosquito eradication programs

How is the unemployment rate calculated? Describe the three principal types of unemployment

Many cities have summer concert series in which music is provided in a public park. These performances are free in some areas. Apply the concept of a public good to summer performances and explain whether an admission charge is efficient

SouthState Chemical Co. produces pine oil cleaners in a process that produces emissions that discolor the paint on nearby houses, although the emissions have been declared nontoxic to humans.

a. Is the price for the cleaner likely to be allocatively efficient?

b. If your answer to (a) is no, what is an appropriate government policy to correct the problem?

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