After a major ice storm left 90,00 . New York utility customers without power in January 1998, generators that normally sold for $500 were being sold for as much as $3,000 . New York law prohibits raising prices for necessities in emergency situations

Elevated prices prompted the State Attorney's office to promise to prosecute price gougers. a . Explain how this law prevents markets from clearing. Does it create a price floor or a price ceiling? b. How might antiprice gouging legislation actually work to keep people cold longer?

a . The increase to $3,00 . per generator is understandable. With no electricity and people demanding heat,
the demand curve for generators must have shifted dramatically out to the right, raising the price to
$3,000 . The New York law prohibiting prices from skyrocketing in emergencies is manifested in a
price ceiling, which creates an excess demand for generators.
b. If the price were allowed to reach its new equilibrium without government interference, then price
would rise, ultimately to $3,000 . and at that price, the quantity of generators supplied would equal the
quantity demanded. The market would clear. At the ceiling price, however, the quantity supplied
would be less than at the new equilibrium price so that fewer people would have heat.