Date Written: 10/28/2022
Assignment: Write 500 words on this topic, “Who should have the authority to set prices, the free market or the state? Why?”
The simple answer to this question is that the free market should set prices. There are a many reasons why the free market should be in control of prices. Three of the main reasons are: It will keep prices lower. It will reduce the level of waste in the economy. Finally, it will prevent shortages.
It Keeps Prices Low
The best way to show this is with an example. First, let’s consider the price of electricity, which is set by private businesses. In 1907 the price for one kilowatt-hour of electricity was about 50 cents. Today the price for one kilowatt-hour is about 8.6 cents (depending on your area). Thankfully the price has gone down significantly since then. Especially since the modern home uses about 11,000 kilowatts of electricity per year.
Now, let’s look at the price of a postage stamp, which is set by the state. In 1907 the price of sending a post card was about 1 cent. Today the price of sending a post card is about 28 cents. Unlike the private business the state run business has raised it’s costs over time. How can we expect the state to keep prices low for billions of different goods and services when they can’t keep the price down for one?
It Reduces Waste
When the state limits the free market by creating price floors it creates waste. Price floors are when the state doesn’t allow producers to sell their products below a certain price. If customers are only willing to buy the product below the price floor, then the producers will end up with a surplus of goods. These surpluses are wasteful. For example, if you had a surplus of 500 pies that you couldn’t sell, it would be considered a waste of resources.
It Prevents Shortages
To show this point I will start with the causes of shortages. They are caused by the state creating price ceilings. Price ceilings are when the state prevents producers from selling their products above a certain price. When this happens many customers will buy the product, even if they only kind of wanted it, because the price is low. However, this low price makes it harder for the producer to make a profit and produce more of his product. In this case, demand exceeds supply and there are shortages. When the producer can raise his prices less customers will buy the product, but the people that do buy it will be the people who truly wanted it. In this case, supply and demand are even. On a side note, this higher price will entice other producers to enter the field. This will naturally lower the price while keeping supply and demand even.
As you can see, the free market should have the authority to set prices. It will keep prices lower. It will reduce waste. And it will prevent shortages. Even still there are more reasons that the free market should set prices, that are beyond my understanding.
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