In: Economics
"Scarcity implies that some way of rationing goods must be found." Explain how the market price system promotes greater economic activity than alternative systems of deciding who gets the benefits of production. (eg., first come-first served, equal shares or random lottery.) (6 points)
In the market price system, the laws of demand and supply work. Demand and supply interact with each other to determine the price level in the economy. Now, at this price level, only those individuals will be able to consume the product who are willing and able to pay for the product. In this process, the consumers also earn consumer surplus. Producers earn their producer surplus.
Now, let us suppose that the market system was not there and instead systems such as first come first serve would be prevalent. In such a system, we might exclude many people actually willing and able to consume the product. Moreover, it would have been difficult to look for price signals and set the appropriate level of price. This way either the consumers might lose consumer surplus or the producers might lose producer surplus. Moreover, it would have been difficult to estimate the appropriate amount of quantity to be supplied.
Thus, pricing mechanism promotes economic activity by ensuring that an efficient level of quantity is produced.