Question

In: Economics

1 a)Suppose there is a disruption on a substantial amount of supply in the gasoline market....

1 a)Suppose there is a disruption on a substantial amount of supply in the gasoline market. If the gasoline market is perfectly competitive, will a gasoline shortage result? Explain your answer.

1 b) Is the price mechanism of a perfectly competitive market a good mechanism to allocate gasoline? Is it good during periods of very high gasoline prices? Alternatively, during periods of very high market gasoline prices, should the federal government place a price ceiling on gasoline? Explain your answer.

Solutions

Expert Solution

1) a) Yes a gasoline shortage will occur in short run because a disruption due to any external reason or natural reason has nothing to do with market structure . if there is disruption in supply then even if market is competitive all firms will not be able to meet the market demand because gasoline is something which is naturally obtained and then refined .

b) Yes it is a good mechanism . This is because gasoline is an essential commodity with highly inelastic demand . In a perfectly competitive market there is both allocative and productive efficiency which assures the lowest possible price for such an essential good . Yes it is good during very high gasoline prices which attracts more firms and brings down market price .

Placing a price ceiling results in shortage of gasoline . There is excess demand and lack of supply . So a price ceiling will lead to black marketting and illegal measures which will actually keep gasoline prices high .


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