Party, to answer your questions:
Market makers can short a stock at any price, and they do NOT have to borrow the shares. In fact, this is one of their DUTIES as a market-maker. If somebody wants to buy stock, and there is none to be had, it's the MM's duty to short them the stock, whether they can borrow it to short or not. This explains a lot of inter-MM transactions, BTW - MM has a customer that wants the stock, MM shorts it, then has to eventually buy it from another MM.
Generally, MM's make their money on the spread, not"driving the price down" to buy shares for less money". If they did do that, I suggest that none of us could survive the game, because the MMs have all the information, and play the game all day, every day - they are good at it. While there are certainly some bad apples in the barrel, most MMs make their money making a market - trading the spread, and trying to go home with no inventory (and no risk). (This means that they'd rather not go home with a short, either.)
There's nothing magical about a buck. (In terms of shortability.) Most of us can't short a stock under $4 or $5, because below that, stocks aren't marginable. In order to short a stock, (for you and I, at least) it must be marginable.
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