The price mechanism allocates resources by
1 )
allowing prices to rise and ration demand when there is a surplus in the production of a good.
2 )
preventing firms with monopoly power from exploiting consumers and charging a price above the competitive price.
3 )
setting prices to ensure that the opportunity cost of producing a good is less than its social cost.
setting relative prices to determine the quantity of factors of production used in producing each good.
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