Background: Boston is Massachusetts capital, U.S. There was
a water pipe break down in 2010, which created The 2010 Boston Water Emergency.
Martha Coakley was Attorney General.
Due to this water pipe break, scarcity for drinking tap
water was created in many towns around Boston. By this vendor /producers
increased the price of the bottled water too high, tens of thousands of
consumers could not afford the bottled water.
Vendors took advantage of this situation and engaged into
Price Gouging (seller spikes the price of goods to a level much higher than is
fair). To control this Coakley conducted spot-checks and if found price gouging
legal action was warned. Even the Governor Deval Patrick reacted and ordered
State’s division of standards to monitor the price of bottled water.
Here economic concept involved is Price mechanism (fluctuation of price because of changes in supply
and demand)
When the demand for bottled water increased (drinking water
became scarce) the price of water increased quickly. But actual scenario is
rising the price of limited resources helps to keep the resources from
vanishing.
Imagine, due to the massive pipe break tap water goes
undrinkable due to this, consumers buy bottled water from vendors A and B. Vendor
A being faithful to the society and government doesn’t change the price of
bottled water, but vendor B being more interested in profits increases the
price too high. Obviously consumers buy bottled water from vendor A, which
cleared his stock in a flash. At vendor B there was a lot of stock left,
considering the high price of bottled water consumers started buying less
amount of water than they needed.
By this situation it is understood that when demand intensifies
prices rise, due to this supplier works hard to meet the demand.
Letting prices rise freely isn’t the only option left when
there is a sudden shortage of goods. We can also consider Government rationing which
means distribution of scarce goods, it is also referred as the artificial
control of demand and supply of goods.
Source: What’s Wrong with Price Gouging? By Jeff Jacoby
(principles of Microeconomics – N.Gregory Mankiw)
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