When people must pay a higher price, they needn't report their level of need, only decide whether it justifies the higher price. There is no incentive to exaggerate or lie and no need to collect information about the uses to which people plan to put the generators. Rationing according to peoples' willingness to pay the market price is not a perfect way to evaluate who has the most urgent need for scarce goods, but it functions quickly, impartially, and without rewarding dishonest reporting. Whatever the limitations, seeing what people will actually sacrifice to obtain something is the only reliable way that their true preferences are revealed. Have the student imagine that they manage a store that sells portable gas-powered electric generators.
Hurricanes are frequent events in Southern Florida.
After Hurricane Andrew in 1992, thousands of homes in the Homewood community were damaged or destroyed. Several weeks after the storm, many houses had still not been repaired. First, higher market prices communicate an urgent need to potential suppliers, even suppliers located far from the site of the emergency. Second, they reward suppliers for going to the trouble to supply the additional product. This allows the quantity of the product to come closer to meeting the high demand.