Quiz 16: Government Regulation of Business


Change in allocation of resources indicates how and when resources are reallocated from one process to another or from one place to other. This change in allocation happens only when the company wants to have a win-win situation and they want to increase social welfare so that everyone is happy in the company. This will help raise efficiency in production process and increase numbers of units produced. It will be a win-win situation as not only will its employees be happy, but its production will also increase.

Allocative efficiency refers to achieving that level of resource allocation whereby no one can be made better off without making the other one worse off. It occurs at the point where P = MC. A shortage does exists whenever an industry fails to achieve allocative efficiency and leads to under allocation of resources, but this under allocation does not lead to a shortage. For e.g. in case of a monopoly, P is greater than MC, yet there is no shortage in the economy. Buyers can still buy products though at a higher price.

Price ceilings help lower down the prices of goods, in case the prices charged by the consumers start becoming very high, thus making the goods out of reach of general public. Likewise, when goods are in short supply, government rations them by charging lower prices on the basis of income of the people, first-come-first-serve basis etc. But this method does not lead to a lowering down of the prices for everyone, or making the good available for the consumer with the highest willingness to pay. It merely allocates them either to the poor or the people willing to wait in lines to get them. Thus, this process does not help allocate resources to the people who value it the most. Rationing coupons are one way to help overcome this inefficiency. These coupons function just like property rights, and can be sold and traded legally in the market. This helps people placing the highest value on the good get the product.