In a market economy, a sudden increase in the global demand for electric vehicles leads to a sharp rise in the market price of cobalt, a key component in lithium-ion batteries.
Which of the following best describes how the three functions of the price mechanism (rationing, signalling, and incentive) operate in this scenario to reallocate resources?
The rising price of cobalt rations the scarce supply to battery manufacturers with the highest willingness and ability to pay, signals to mining companies that cobalt is relatively scarce, and provides an incentive for these companies to invest in expanding extraction capacity.
The rising price of cobalt rations the supply by encouraging existing mining firms to exit the industry, signals to consumers that electric vehicles are now cheaper, and provides an incentive for the state to centralise resource allocation.
The rising price of cobalt signals to mining companies that they should reduce production, provides an incentive for consumers to increase their consumption of electric vehicles, and rations the resource by lowering the price of alternative battery chemistries.
The rising price of cobalt rations the resource by ensuring all manufacturing firms receive an equal quota, signals to mining companies that demand has permanently fallen, and provides an incentive for firms to reduce their exploration budgets.
