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III. (1 1 points) Please read the article reprinted below titled "Notable & Quotable: Gouging" written shortly after the onset of the Covid pandemic (March 31, 2020) and answer the following questions. Note: The phrase "price-gouging" refers to a situation where some sellers charge prices (e.g., for health equipment and supplies) that are well above the previous market price charged by sellers. 1. Explain why it is not possible for individual sellers to charge a price above the market price assuming a perfectly competitive industry. 2. Assuming the market for health care equipment and services (e.g., ventilators, masks, testing, etc.) operates like a perfectly competitive industry, explain what would be expected to happen to the market price (P) and industry output (Q) of health care equipment in a) the short run and b) the long run due to the outbreak of the Covid pandemic. Also, explain what would be expected to happen to economic profit for firms in health 3/ 31 / 20 Notable & Quotable: Gouging From Brandon Fuller's interview cally. At something close to normal with Paul Romer, University Profes- prices, it is unlikely that a firm will sor at New York University and co- buy the additional capital equip- recipient of the 2018 Nobel Prize in ment necessary for a many-fold in- Economics, City Journal, March 25: crease in their production capacity, only to meet a temporary surge in Fuller: So ubiquitous testing and demand. Firms won't be able to re- plentiful personal protective equip- cover their costs from capital ment are the keys to getting people equipment. back to work and restoring eco- So I think we have to be creative nomic normalcy. How do we get about using things like the Defense from where we are today-short on Production Act and having the gov- tests and protective equipment-to ernment do what it has done to mo- where we need to be? How can pol- bilize resources during past wars. I icy induce more tests and more and think we need to be realistic that better equipment? very high prices will not be politi- Romer: There's an interesting cally or socially acceptable, govern- constraint here involving percep- ment will need to be creative, and tions of price-gouging. We may find other ways besides a temporar- need just to accept the fact that ily high price that can make it at- many people get very upset when tractive for firms to undertake a they see what they think of as surge of production. For example, price-gouging. And many firms the government might pay for the don't want their reputation dam- cost of the capital equipment aged because they are accused of it. needed to expand production and Economists know that this is ineffi- then lease it on a month-to-month cient, but it's just the reality. But basis to the firm so that the govern- it's also important to understand ment bears the risk of a quick end that a firm making N95 masks will to the crisis that makes the excess need to scale production dramati- capacity obsolete