Price Mechanism Fails with Effective Price Controls

Steps:

• Define price mechanism: Prices freely adjust via supply and demand to allocate scarce goods efficiently.
• Identify failure condition: Intervention preventing price flexibility disrupts allocation.
• Assess options: Check if each blocks price signals or equilibrium.
• Select: Option showing binding government control on price.

Why B is correct:

• An effective maximum price (price ceiling) is set below equilibrium, preventing price rises to clear markets, causing shortages resolved by queues or rationing, not prices (per basic supply-demand law).

Why the others are wrong:

• A: Banning advertising limits promotion but allows prices to still signal scarcity and allocate goods.
• C: Limited supply triggers higher prices to ration goods, enhancing price mechanism function.
• D: A powerful company (monopoly) sets higher prices but still uses price signals for allocation.

Final answer: B