How does a price ceiling undermine the rationing function of

How does a price ceiling undermine the rationing function...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
The existence of a cap (or "ceiling") on prices presumes that, given market conditions, the prices would likely be higher. In a competitive market, a given vendor would lower its prices in an attempt to undercut other vendors and draw in more consumers. The vendors with higher expenses or otherwise lower efficiencies would be driven out of the market, to the benefit of consumers. If there is a shortage of the product, due to production difficulties or other problems, then the price would rise, so that the more-willing consumers would, in effect, fund the greater costs ensuing from the difficulty in obtaining supplies. The product would then be driven, through the pricing mechanism, to the most-interested buyers, and the vendors would have incentive to continue supplying the product for as long as consumers were interested. If the price rose to the point that demand dropped, then the vendors would know that their efforts will no longer be rewarded, and would cease seeking the product. Somewhere
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/16/2012 for the course AMERICAN I American I taught by Professor Americaninternationcollege during the Spring '12 term at American Internation College.

Page1 / 2

How does a price ceiling undermine the rationing function...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online