Question

Carribea is an island country governed by the communist party. In 1962, a food ration system was established in order to provide basic food to all citizens. The booklet issued and distributed by the government clearly states that Carribeans can buy centrally regulated amounts of basic food items, such as wheat, rice, oil, eggs, chicken, sugar and cooking oil, from the food ration stores at prices that are even lower than the production costs. Carribeans can also buy food products at the market, where the prices are determined by demand and supply and are much higher than those at the food ration stores. Evaluate the food ration system and the free market for food in Carribea from the perspectives of efficiency and equity.

Answer 1

There are different kind of consumer in the market .some with high income and some with low or very low income.their price willing to pay for same. Good is also different. Their individual demand also different .market demand include both kind of demand. When price determined by market demand equal to Market supply,price determined might be very high for some consumer that ,it is more than the maximum price they willing to pay .

So that's why government establish food ration system to provide those low level income people those good ,that they cant afford due to high market price.goverment purchases goods from producers at market price and sell to low level income at lower price than market price from ration stores. The price difference is beared by government.

From efficiency perspective, the free market is competitive so it efficient.there are two kind of efficiency , productive and allocative efficiency.

Productive efficiency is when p= ATC

Allocative efficiency is when p=MC

Goverment is selling good p<ATC/MC,

BUT government bought goods at market price and at market price ,p=ATC/MC,

So from efficiency perspective food ration system and free market system work at full efficiency level.just the bearing cost by government is subsidy to low level income consumers.

From equity perspective ,In the absence of food ration system ,low level income people can't able to get goods.so there will inequality in the economy.because of establishment of food ration system ,low level income consumer can get goods now.

So ration system bring equality in society.