Question

Please answer the following question in details. Specific subject: MICROECONOMICS

What mechanisms allocate resources when the price of a good is not allowed to bring supply and demand into equilibrium?

Answer 1

In a market where the price of a good is not allowed to bring supply and demand into equilibrium, alternative market mechanism tends to allocate resources.

Case 1: Binding price floor  

For example, when there is a surplus (a situation in which quantity supplied exceeds the quantity demanded) resulting from a binding price floor, it leads to undesirable market mechanisms.

As the price is way too high, some sellers will be unable to sell their goods at that price.

That's why they may appeal to the buyers' personal biases where perhaps due to familial ties, they will be better able to sell their goods than those who do not.

Case 2: Binding price ceiling  

Again, when there is a shortage (a situation in which the quantity demanded exceeds the quantity supplied) resulting from a binding price ceiling, it will also lead to undesirable market mechanisms.

As the price is way too low, some buyers will be unable to buy the goods at that lower price.

That's why sellers may ration the goods according to their personal biases ( selling it to friends, relatives, or people from their own community ) or make the buyers wait in line to get the goods. They can also ration the goods by discriminating according to age, sex, and circumstances

Therefore, these are the mechanisms through which resources get allocated when a good's price has not been allowed to bring supply and demand into equilibrium.