Higher Rock Education - Economics Blog

Tuesday, August 22, 2017

Economic Analysis of the Solar Eclipse

Yesterday was the big day! For the first time in 99 years, a solar eclipse was visible from coast to coast across the United States. Every state on the continental US experienced at least a partial eclipse, but many packed into the narrow 70-mile wide band called the "path of totality." With such a large influx of people, the economic impact on some small towns across America is bound to be significant.

Take Hopkinsville, KY. It is a small town in western Kentucky with a population of about 31,800 people. The town, which experienced the greatest length of totality in the nation, designated itself as Eclipseville, and was expecting over 100,000 visitors! Imagine the impact on restaurants, hotels, gas stations, and other businesses that might benefit from such a surge in tourism. With so many people expected, the town even opened up some of their public community space for people to set up tents and RVs. According to CNBC, a room at the local La Quinta Inn and Suites was rented for $425 per night, when just the prior weekend its rate was $93!

Hotels close to the path of totality all across the nation hiked rates in expectation of so many travelers. As rates for lodging skyrocketed, questions were raised about price gouging. Is it fair for businesses to take advantage of a significant event like the eclipse by charging much higher rates? Let's use supply and demand to answer that question. Pricing is the most efficient mechanism for allocating scarce resources in a capitalistic society. The solar eclipse is certainly a rare event and a once-in-a-lifetime experience for many people. The scarcity of the moment created value, and people were willing to pay astronomical amounts for prime viewing. According to the law of demand, as prices increase, the quantity demanded of a good or service decreases. However, factors other than price can shift the entire demand curve and cause an increase or decrease in the quantity demanded at every price point. In the case of the eclipse, anticipation of the event caused the demand curve for many products and services offered by businesses in the path of totality to shift to the right (increase). As a result, businesses were able to charge a much higher price and still have customers who were willing to pay for their good or service. Clearly the supply was limited, and pricing was the most efficient way to allocate the available rooms.

What about the producer's perspective? The law of supply states that as the price increases, producers are willing to supply more of a good or service. As the price of food and lodging increased due to rising demand, companies that had the capacity willingly supplied more of their good or service. However, as with the demand curve, factors other than price can shift the entire supply curve. New companies entered the market because they were attracted to the higher rates caused by the increase in demand. People who live in the path of totality rented out their homes, yards, or fields for people to set up a tent to view the eclipse. With very low barriers to entry, many took to websites like Airbnb or Craigslist to earn a few dollars by offering a place for travelers to stay. According to USA Today, even some universities such as Oregon State University and Eastern Oregon University opened up some of their on-campus housing for people to stay for a substantial fee. Most of these suppliers would have not provided a bed without the increase in price. An influx of new suppliers to the market causes a shift of the supply curve to the right, which lowers the market equilibrium price. However, the slight decrease in the market price due to new suppliers was not offset by the significant increase in the demand for products and services in the path of totality. With the shifting supply and demand curves, a new market equilibrium was reached, which allowed businesses to respond to such a high demand with significant rate hikes.

For many small towns in our country, the good fortune of being in the path of totality might prove extremely beneficial to their local economies. Regardless of whether you got to experience totality in one of these remote places, we hope you got to safely participate in this spectacular event in our nation's history!

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