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    Effective use of rationing coupons

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    I don't understand how a price ceiling undermines the rationing function of market determined prices. How could rationing coupons ensure that consumers with the highest values get the limited amount of a good supplied when government price ceilings create shortages? I believe that the answer is based upon demand, supply and market equilibrium.

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    Price ceilings are useful in markets where competition is weak or not yet established. In highly competitive markets, it is true that a price ceiling will serve only to create a shortage. This is because the sellers will produce less at the lower price, while customers will be demand more. You indicate that you understand this mechanism by which equilibrium is established. However, in monopolies for example, price ceilings would not have this effect. Remember, monopolies are able to charge higher prices by ...

    Solution Summary

    Effective use of rationing coupons to ensure efficient allocation of a scarce resource