When the government prevents prices from adjusting naturally to supply and demand,
A)it stabilizes the economy by reducing market uncertainties.
B)it adversely affects the allocation of resources.
C)the improvement in equity justifies the reduction in efficiency.
D)the improvement in efficiency justifies the reduction in equity.

Question

Quizplus · Accepted Answer

Preventing prices from adjusting naturally to supply and demand creates market inefficiencies by distorting the allocation of resources. When prices are not allowed to rise or fall based on market forces, suppliers and consumers may not make optimal choices. While it may provide short-term benefits, such as stabilizing prices and reducing market uncertainties, in the long run, the distortions may result in lower economic growth and efficiency. In terms of equity, it is subjective and varies based on policy objectives, so it cannot be generalized as a justification for compromising efficiency.

When the Government Prevents Prices from Adjusting Naturally to Supply