Read the passage and choose the phrase that best fills the blank:

In classical economics, price signals coordinate decentralized resource allocations by condensing complex local information into a single numerical index. When regulatory authorities arbitrarily fix artificial price ceilings below market-clearing levels, the natural coordinating mechanism breaks down, resulting in _____.

Answer and explanation

Correct answer: C. acute shortages and the proliferation of informal black markets

  1. Step 1: Apply basic microeconomic theory to price controls: when a legal price ceiling is set below the market equilibrium price, quantity demanded rises while quantity supplied falls, generating a chronic shortage.
  2. Step 2: Trace secondary market distortions: because buyers cannot obtain goods at the official ceiling price, unofficial distribution channels emerge to capture unsatisfied demand. Therefore, the breakdown causes "acute shortages and the proliferation of informal black markets".
Answer
acute shortages and the proliferation of informal black markets.
Why not the others: "a massive spontaneous increase in producer inventories" contradicts the fact that producers curtail production when prices are capped below costs; "the immediate eradication of consumer demand" is false because lower prices stimulate rather than eliminate consumer demand; "perfect economic efficiency without deadweight loss" describes idealized free markets, whereas price ceilings create deadweight loss.

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