During a crisis such as Hurricane Sandy, governments often make it illegal to raise the price of emergency items like flashlights and bottled water. In practice, this means that these items get sold on a first-come, first-served basis.
a. If a person has a flashlight that she values at $5, but its price on the black market is $40, what gains from trade are lost if the government shuts down the black market?
b. Why might a person want to sell a flashlight for $40 during an emergency?
c. Why might a person be willing to pay $40 for a flashlight during an emergency?
d. When will entrepreneurs be more likely to fill up their pickup trucks with flashlights and drive into a disaster area: when they can sell their flashlights for $5 each or when they can sell them for $40 each?