Consulting – Thinking Beyond First Order Effects – If a local area is devastated by floods destroying many houses, there will be a huge demand for hotel rooms, essential food items etc.
If the sellers of these items raise prices,
First Order Thinking: They are extorting. Authorities should impose price controls.
Second Order Thinking : They have limited supplies and there is too much demand. They are going to make profits. Good for them. Not good for consumers.
Third Order Thinking: If they had maintained the same prices, those who arrive first would grab all they can. The others would be left with nothing. But if the price is very high, even those who arrive first, will ration and economize. They will ensure a fairer distribution. e.g. A family that would have occupied two rooms will try to fit into one.
The same principle applies to supplies of essential food items. Further, since the price is high, sellers from other regions are incentivized to come in. It is worth their while to travel from far. That will restore normalcy faster! Moreover, sellers will try to arrive fast as that will likely get them a higher price!
