Chapter 19.4, Problem 4R

To determine

To explain: The way in which setting quotas for production in industries can cause surplus or shortage in goods and services.

Explanation of Solution

In China, the state has ownership of most parts of the economy. It owns the urban industries as well. It has been a practice in China that the production quota is set by the government, and provincial governors are held responsible for setting the production quota. The government held responsibility for leasing land and leases for a specific time period to certain individuals.

However, the setting of production quota can lead to a shortage in the supply of goods, and sometimes if there are enough goods available in the economy, it can lead to a surplus. The production of goods or availability of services should be based on aggregate demand and supply to avoid surplus or shortage.