Following a severe crop failure that drastically reduces the global supply of cocoa, the market price of cocoa rises sharply.
In a free market economy, how do the signalling, incentive, and rationing functions of the price mechanism operate to reallocate resources in response to this supply shock?
The rise in price signals that consumer preferences have shifted away from cocoa, incentivising firms to diversify into other agricultural sectors, whilst rationing the surplus cocoa through government-mandated price floors.
The rise in price signals the increased relative scarcity of cocoa, providing an incentive for producers to allocate more resources to its production over time, whilst rationing the existing scarce supply to consumers with the highest willingness and ability to pay.
The rise in price signals to the government that intervention is required to correct a market failure, incentivising public provision of cocoa, whilst rationing consumption through administrative queueing.
The rise in price signals to consumers that they should increase their purchases before prices rise further, incentivising producers to hoard stocks, whilst rationing resources to ensure an equal distribution across all consumer groups.
378 exam-style questions on AQA A Level Economics 1.8 The market mechanism, market failure and government intervention in markets, covering 1.8.1 How markets and prices allocate resources, 1.8.2 The meaning of market failure, 1.8.3 Public goods, private goods and quasi-public goods, 1.8.4 Positive and negative externalities in consumption and production, 1.8.5 Merit and demerit goods, 1.8.6 Market imperfections, 1.8.7 Competition policy (A-level only), 1.8.8 Public ownership, privatisation, regulation and deregulation of markets (A-level only), 1.8.9 Government intervention in markets, and 1.8.10 Government failure. Each one has a worked solution and a mark scheme showing where the marks go.