Effective price ceilings cause misallocation of resources because scarce resources are usually not allocated to their highest-value uses.

Question

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When there is an effective price ceiling, it sets the price for the good or service below the market equilibrium price. This creates excess demand, and scarce resources are not always allocated to their highest-value uses because the price signal is distorted. For example, if the price of housing is controlled below the market price, people may be willing to pay more for better quality housing or in a more desirable location, but these resources are not allocated accordingly as they cannot pay the higher price. Instead, they have to settle for a lower quality or less desirable housing or may resort to alternatives like sharing, which may not be their preferred option. This leads to a misallocation of resources, and the market is not functioning efficiently.

Effective Price Ceilings Cause Misallocation of Resources Because Scarce Resources