A sudden surge in global demand for cobalt, an essential raw material for high-tech components, causes its market price to rise sharply. Within a free market economy, how does this price rise operate through the price mechanism to reallocate scarce resources?
It signals to consumers that cobalt has become more abundant, incentivising them to substitute it with cheaper alternatives while rationing producer revenue.
It acts as a signal of increased scarcity, incentivising producers to expand cobalt extraction while rationing the available supply to buyers willing and able to pay the higher price.
It enables government agencies to ration cobalt to key manufacturing sectors, incentivising mining firms to maintain low, stable prices.
It incentivises buyers to increase their quantity demanded immediately, signaling to producers that they should decrease supply to prevent a surplus.
