Following a sudden global surge in the demand for electric vehicles, the market price of lithium (a key component in batteries) increases significantly. In a free market economy, how does this price increase coordinate the reallocation of scarce resources?
By signaling to mining firms that consumers value lithium less, prompting a reallocation of labor towards other mining sectors to avoid excess supply.
By acting as an incentive for producers to reallocate factors of production toward lithium extraction, signaling consumer preferences, and rationing the scarce supply to those most willing and able to pay.
By prompting the government to set a maximum price to prevent market failure, thereby ensuring a fair and equitable allocation of lithium to all battery producers.
By automatically resolving the free-rider problem associated with lithium consumption, ensuring that the resource is classified and allocated as a public good.
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.