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Following natural disasters like tornados or hurricanes, hotels often raise room rates, and stores increase the price of bottled water
Following natural disasters like tornados or hurricanes, hotels often raise room rates, and stores increase the price of bottled water. Critics of this practice claim that it exploits vulnerable people in their time of need. Using supply and demand analysis, explain why the seemingly inhumane practice of increasing the price of such essentials following natural disasters might be more humane than requiring prices to remain stable.
Expert Solution
A natural disaster always causes the loss of available resources in the economy. With less resources, the manufacturer of commodities or service provider are able to offer less quantity in the market and cause supply to shift leftward.
As shown in above, the market at point A is in equilibrium before natural disaster and selling Q units at $P price. With natural disaster, the supply curve shifts to S1 causing change in equilibrium to B. Therefore, the price rises in nation.
On the other hand, if price stays same, then the market will demand Q units at P while due to less resource, suppliers can only supply Q2 units at this price. This will causes greater demand in the market and due to shortage of supply, the situation of panic and black marketing will occur in the economy. Therefore, the rise in price is more humane to reach efficiency.
Following diagram shows the given situation:
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