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In: Economics

What happens when prices are determined by the state rather than by the interaction of many buyers and many sellers in the marketplace?

What happens when prices are determined by the state rather than by the interaction of many buyers and many sellers in the marketplace?


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Expert Solution

When the prices in the market are set by the state and not by the interaction of buyers and suppliers, it leads to wastage of resources and dis equilibrium or market failure. For example, if the price is set at a point higher than the equilibrium then the supply will be more than the demand and that will lead to surplus of goods in the market, people will be supplying the goods that are not even valued that much and wasting the resources on it.

If the price is set below the market equilibrium then the demand will be more than the supply and that will create a shortage and deadfweight loss in the market, this can also increase the black marketing of the goods because all the people who need the goods in the market will not be getting it. SO, overall this leads to market failure and wastage of resources.

Rahul Sunny answered 2 years ago
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