Imagine a standard supply and demand graph for a single good with the price below equilibrium, so the quantity demanded exceeds quantity supplied.

Here are the problems: (1) allocative inefficiency; (2) strife among the buyers; (3) harm to seller; (4) harm to the market process.

I’ve outlined part of the reasoning earlier. Read it first.

(1) If C cannot resell X to A which is likely since C is taken to play the role of a consumer, then a mutually beneficial exchange fails to take place. The efficient allocation of X is not achieved.

(2) To quote further, “the immediately seen inefficiency is that it introduces competition between A, B, and C for X, such that only one of them can obtain it. The buyers are in each other’s way, disrupting the social harmony. It makes the first recipient of X depend on luck.” Or even on how eager he is to shove the other fellows out of his way.

A related point is that if the disequilibrium causes a line of buyers to appear, then not even the lucky buyers benefit. Here’s why: when a queue is composed of people, of buyers waiting to be served by a seller, it is at the same time inefficient and self-dissolving. This is because the costs of waiting are pure losses. It pays to the seller to raise the price of his product and eliminate marginal buyers from the queue. The remaining buyers are happy to pay for saving time not waiting, and the seller is happy to get their money. The seller thus captures the benefits that are otherwise pointlessly dispersed into nowhere.

In short, the lucky buyers pay less in money but more in wasted time.

(3) The seller is obviously harmed, because he would still sell the entire stock at a higher price. He then cheats himself out of pure profit.

(4) Quoting again, selling X at a higher price “encourages me to stay in business and keep producing X.” If I receive profits, then the profits are a signal to other potential entrepreneurs that there is cash on the table which they can help themselves to. As they imitate me, in time, the supply of X increases, and its price falls, benefiting society.

Under the disequilibrium in this scenario, this signal is muted. Yet the market process and therefore economic improvement proceed most sprightly and vigorously when everyone is seeking profits with his whole soul in the game.

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