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.
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.
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.
A price ceiling is a government-imposed maximum price that can be charged for a good or service. It is set below the equilibrium price established by market forces. When a price ceiling is imposed, it often leads to shortages because the quantity demanded exceeds the quantity supplied at the artificially low price.
The rationing function of market-determined prices refers to the process by which prices naturally allocate scarce resources. In a free market, when prices are allowed to adjust based on the forces of supply and demand, they act as signals, guiding consumers and producers to make efficient choices. When prices are too high, consumers may reduce their demand, while producers are incentivized to increase supply. Conversely, when prices are too low, consumers demand more, and producers may decrease supply.
However, when a price ceiling is implemented, it sets a maximum price that is below the equilibrium price. This discourages producers from supplying enough of the good because they cannot earn sufficient profits at the capped price. As a result, the quantity supplied decreases, leading to a shortage. Additionally, lower prices incentivize consumers to demand more of the good, further exacerbating the shortage.
To address the issue of limited supply and ensure that consumers with the highest values can acquire the limited amount of a good, a government can issue rationing coupons. Rationing coupons are vouchers that are distributed to consumers based on certain criteria, such as income or need. These coupons allow consumers to purchase the good at the artificially low price established by the price ceiling.
By distributing coupons based on predetermined criteria, the government can allocate the limited supply of the good to those who value it the most, while also preventing excessive demand. This reduces the risk of a shortage caused by excessive demand. Rationing coupons effectively prioritize certain individuals or groups over others, ensuring that the limited supply is directed to those who have the highest values, as determined by the government's criteria.
In summary, a price ceiling undermines the rationing function of market-determined prices by setting an artificially low maximum price that leads to shortages. Rationing coupons, on the other hand, can help mitigate this issue by distributing the limited supply to consumers based on specific criteria, ensuring that those with the highest values for the good are prioritized.