The virtue of the price system is that only transactions with more benefits than costs take place. Read more.
Consumers confronted with the price compare it to the benefit they figure the product or service will give them. If the anticipated benefit is greater than the price , they go ahead and buy, which is what you want. If benefit is less than price/cost, they pass — which is also what you want.
The end result of buyers’ and sellers’ interaction is that all transactions where benefits exceed costs take place, while all transactions where benefits are less than costs don’t. Which means overall benefits exceed costs by as much as possible, which presumably is what you want when you set about allocating resources. And it all happens automatically, as consumers and producers pursue benefit and profit, respectively. Thus the great beauty of the price system.
Yes, lots can go wrong. Producers may collude or compete unfairly . Consumers may not understand what’s good for them or may try to free-ride on goods they hope others will buy for them .Article content Or there may be costs that fall on third parties, consequences of A and B’s transactions that fall on C. So run a legal system that allows C to sue. Or, if third-party costs are widespread but it’s hard for all the C’s to get together and sue, try a patch-up on the price system. Tax whatever the activity is, imposing a levy that — according to your best guesstimate — approximates the damage done to the C’s.
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