Price Rationing and Risk Price Rationing & Essay

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Price Rationing and Risk

Price Rationing & Risk

A price ceiling artificially sets the price of a good below the market equilibrium price. With a price ceiling in effect the price is lower, supply is lower and quantity demanded is higher than quantity supplied. Price ceilings are effective in keeping the price of a product low but this unbalance results in excess quantity demanded. When rationing is implemented it is a form of a command economy.

Coupons are a way to manage the demand and to ensure that the maximum amount people who demand the good at such a low supply receive the good. In short, effective use of rationing coupons helps to efficient allocation of scarce resources. Without couponing, those whose demand allows them to purchase more at the artificial price would consume more of the good leaving less for others. Some contend coupons are ineffective since the supply is not driven by the market.

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The value of coupons is inevitably to be determined by those who want to take them, not those who want to use them.

This is a graphical depiction of a price ceiling, represented by P*. As you can see the shortage created by the artificial price, which tells us that the quantity demanded will exceed the quantity supplied. A coupon issued will allow the government to artificially fix the shortage. Giving more people the opportunity to consume the good, since at the low price it is likely that the good will be consumed before others will have the opportunity to purchase it.

Risk aversion refers to the level of uncertain payout one is willing to undertake. When examining risk tolerance one must understand that the risk borne by an organization or individual is directly related to the anticipated….....

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