Monday, September 15, 2008

News and Economics From Ike

My friend and fellow Grinnellian, Dan Rothschild has been spending the past three years studying Katrina. I guess he felt he didn’t have enough experience with hurricanes so he made a stop in Houston on his way back from Pheonix to ride out Ike with his family. I’ve enjoyed Dan’s live blog of the events at Ikeonography and it seems Dan is making his way back to DC.
Dan has asked me to take on an interesting econ question. Here is the summary below

There were strangely few people at the mall or at any restaurants. This seems illogical to me. On the supply side, only some fraction, perhaps a third, of area restaurants were open. Grocery stores are still getting resupplied with perishable goods. Refrigerators were off long enough that anything fresh had to be thrown out. On the demand side, many people are still without power, most people are staying home from work, and everyone’s doing enough physical labor to work up a healthy appetite. And in addition, no power means no AC, and since the restaurants are all air conditioned, you’d think that it might be an additional reason for people to go out. So you might think, then, that the supply of restaurants is down and the demand for restaurant-cooked food is up. So why are there not lines out the door? I have asked the Blog of Diminishing Returns to take up this question.

So, some theories. My first, guess it is a case of imperfect information, perhaps people don’t know that the restaurants are open. Standard economic theory requires both buyers and sellers know what is available. My second is that the demand just is not there either people have left or do not want to leave their house maybe because of fear of damaged road, little/costly gas to get to restaraunts, or perhaps in some areas looters.

One difference between local gas prices and restaurant prices. When shortages occur prices go up, imagine you are a seller with more customers than you can handle, you raise your prices. My guess is that local gas stations have more ability to change price quickly, as anyone who has seen gas prices go up the last couple of days can tell you. In the case of a chain restaurant or grocery store, my guess is that local management at Applebee’s or Safeway won’t raise prices when lines are out the door, but a gas station will. I think the reason we don’t see shortages of food as much as gas, is many people have a few days worth of food around, but perhaps not enough gas to get out of a hurricane’s way.

Oh and that picture on the right is from Ohio, that's my child hood home the one behind the tree. Remnants of Ike hit central ohio last night. My parents lost power (in their new house not the one with the down tree), but they decided to stay in. Perhaps that is what everyone else is doing, staying in because they are too tired to go out.

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