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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 shortages? Fully explain your answer based upon demand, supply and market equilibrium.

  • Economics -

    This is what I've come up w/ so far... I just need to expand a bit....

    Artificial supply creates artificial demand.
    Coupons don't work because the supply is not market driven. What they create is a black market. The value of coupons is inevitably to be determined by those who want to take them, not those who want to use them.

  • Economics -

    I don't know what "artifical supply creates artificial demand" means at all.

    A price ceiling that is below the otherwise equilibrium price creates a market shortage. (illustrate this on a supply-demand graph).

    I like your sentence about the black market. With rationing coupons and a black market. People who value the product for less than the ceiling price and less than the black-market price will sell their coupons to people who value the product more than the ceiling price and more than the black-market price.

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