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Managerial Economics

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How does a price ceiling undermine the rationing function of market-determined prices? How could rationing coupons insure that consumers with the highest values get the limited amount of a good supplied when government price ceilings create shortage? Fully explain answer based upon demand, supply and market equilibrium.

  • Managerial Economics -

    Take a shot, what do you think?
    Hint: draw a supply and demand graph, then draw a ceiling price below your equilibrium price. At that price, how much are producers willing to supply? how much do consumers demand?

    Hint2: could people sell their rationing coupons?

  • Managerial Economics -

    by social economic efficiency under perfect competition.

  • Managerial Economics -

    Price ceilings are the highest prices of goods and services that firms can charge consumers. “Ceiling price is the maximum price the government permits sellers to charge for a good. When this price is below equilibrium, a shortage occurs.” (Thomas & Maurice, 2010, p.75).These upper limits imposed occasionally on price of a good or service by the government in order to protect consumers. “Voluntary exchange at the market –determined price insures that industry output is purchased by the consumers who place the highest value on consuming the goods and services.” (Thomas & Maurice, p.659). Normally, consumers whose demand prices equal or exceed the good or service market price will buy that good or service, while consumers whose valuation are less than the market price will not buy that product or good. “This process by which prices serve to ration goods to their highest-value users through voluntary exchange is generally referred to as the rationing function of prices.” (Thomas & Maurice, p.656). Rationing usually happens during wars or major crisis in the free world and all the time in social countries such as Cuba.

    The market equilibrium occurs at the price level for which quantity supplied equals the quantity demanded. When the government sets a price ceiling below the market equilibrium price, the demand will exceed supplies and create a shortage in goods and services. This shortage will influence people to create a black market. Goods and services are sold at higher prices in the black market and only people with the highest values will be able to get the limited amount of a good supplied when government price ceiling create shortages. Although sellers in the black market will not be able to legally charge more for these goods than the imposed government price, they normally charge fees such as transaction or finders’ fees to get around it. Consumers with the highest value, greatest resources, highest needs and the willingness will buy it.

    Let us assume that the Unites States Government rations essential goods such as meat and gasoline, what do you think consumers’ reaction will be? I believe that we will have riots, black markets will be everywhere, and crimes will go up. Theoretically, the issuance of rationing coupons that ensures the availability of the rationed goods (Meat, Gasoline, etc.) to all consumers with limited quantities, will limit the amount consumers with highest value can get. However, in real life, people will sell their rationing coupon books to the highest bidder and starve themselves and their families in order to get cash. This will cause health problems and crimes to rise. The government needs to leave the market alone and only act as a police, judge and an enforcer of the market overall and let the market decide the consumers’ quantity demanded, firms’ quantities to supply and the market to determine the goods and services prices based upon demand and supply. Price control distorts supply and demand and creates problems.

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