26.9.05

I'VE ALREADY SET THE EXAM. But this Catallarchy post on price gouging has all kinds of potential for exam and problem set questions.

The run on gas, gas cans, and generators is one of the few outstanding reminders that yes a major storm just happened nearby (relatively speaking). The only difference is that now the people desperate for gas cans, and generators seem to be by-and-large people who really need them. All day I had people asking me if anyone had returned gas cans or generators - I work the returns desk at Home Depot. They were waiting for the people that didn’t need these items to return them so they could buy them the minute they came in the door.

In fact I got multiple generators returned today, and one 15-gallon fuel tank - all of which were completely unused and unopened. They were all returned by people who overreacted - just a little - to the possibility of Austin catching the edge of a hurricane. Meanwhile the people who genuinely need gas cans and generators, because there is neither open gas stations nor power where they are going to, are combing every retail store in Austin and beyond for them.

Possible prelim question: Suppose the probability of a hurricane making landfall in your neighborhood is 0.50. If it does make landfall, a portable generator will be worth $V to you. If it does not, you have paid $P for a useless asset. What premium above P will allocate the generators efficiently? I haven't framed this question very well, but it's a few months until prelims.

Possible principles question: Under what circumstances is it allocatively efficient for the buyers of generators to return them unused to the store for the full refund rather than to sell them for a higher price directly to people in the affected areas?

Possible policy class question: A person buys a generator from Home Depot in anticipation of a hurricane. The hurricane doesn't happen. The person returns the generator to Home Depot for a full refund. Evaluate the pros and cons of a law prohibiting that person from selling that generator to people who were affected by the hurricane at a price higher than the Home Depot price.

Returning to the post, this observation might help structure the risk-premium question.
And in other news the attorney general of Texas has an 800 number you can call to report incidents of price-gouging, and they've promised to fully investigate any complaints made. Which means that big box retailers are going to be much better off if they don't raise prises to meet the demand for certain items when bad weather threatens. Hardware stores don't really lose anything if they sell out of gas cans, and nobody is going to be particularly upset with the store because other people bought up the items they needed.

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