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When a price ceiling is set, how do we allocate the product in excess demand?

User Dbenhur
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Final answer:

When a price ceiling leads to excess demand, products may be allocated through first-come, first-served, lotteries, or rationing to deal with the shortages, which can result in various consequences including reduced quality and the emergence of black markets.

Step-by-step explanation:

When a price ceiling is enacted, it sets a maximum price on a product to keep it affordable for consumers, which could be below the market equilibrium price. However, this often results in excess demand or a shortage since the quantity demanded at the ceiling price exceeds the quantity supplied. Allocating the limited product amongst the consumers can be challenging. Methods of allocation include first-come, first-served, lotteries, coupons, or rationing, potentially leading to long waits, black markets, and a drop in product quality. The government may also step in to ensure fairness in the distribution of scarce resources.

User Eric Alberson
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