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Question 5
1 ?pts
Which of the following is a major disadvantage of setting the price of a good below equilibrium and using waiting in line rather than price to ration the good?
Compared to price rationing, waiting in line is unfair since it is easier for those with higher incomes to wait in line.
Waiting in line imposes a cost on the consumer; paying higher prices does not.
Both waiting in line and higher prices are costly to consumers, but unlike the payment of a higher price, waiting in line does not provide suppliers with an incentive to expand future output.
Waiting in line benefits consumers at the expense of producers.
Question 6
1 ?pts
The correct answer and explanation is:
Correct Answer:
Both waiting in line and higher prices are costly to consumers, but unlike the payment of a higher price, waiting in line does not provide suppliers with an incentive to expand future output.
Explanation:
When the price of a good is set below the market equilibrium, a shortage occurs, leading to excess demand. This shortage forces consumers to compete for the limited supply of goods in ways other than paying higher prices. One common method is waiting in line, also known as “queue rationing.” However, this approach has several disadvantages, particularly in terms of economic efficiency and incentives for producers.
1. Costs to Consumers
Both price rationing (where consumers pay more) and queue rationing (where consumers wait in line) impose costs on consumers. However, there is a crucial difference:
- In price rationing, consumers with higher willingness to pay can obtain the good by spending money.
- In queue rationing, consumers must spend time instead of money. This is inefficient because time spent in line is a hidden cost that does not contribute to economic productivity.
2. Lack of Incentive for Suppliers
One of the biggest disadvantages of waiting in line instead of allowing prices to rise is that it removes an important market signal.
- If prices rise due to increased demand, suppliers are incentivized to produce more because they see an opportunity for higher profits.
- When price ceilings are imposed and goods are allocated through waiting in line, suppliers do not receive any additional revenue. As a result, they lack the motivation to expand production, which could ultimately alleviate shortages.
3. Inefficiency and Deadweight Loss
Queue rationing can also lead to inefficiencies because it does not allocate goods to those who value them the most. People who have more time (but not necessarily the greatest need) might be able to wait in line longer, securing the good instead of someone who truly values it but cannot afford the time cost. This misallocation leads to what economists call a deadweight loss, where potential economic benefits are lost due to inefficient distribution.
4. Alternative Rationing Methods
While waiting in line is one way to allocate scarce goods, other alternatives include:
- Lottery Systems: Random selection of buyers.
- Government Rationing: Each consumer receives a fixed amount.
- Price Controls with Subsidies: Keeping prices low while compensating suppliers.
Ultimately, the best method depends on the economic and social objectives policymakers want to achieve. However, from a purely economic perspective, rationing by waiting in line creates inefficiencies and discourages supply expansion, making it a less effective long-term solution.