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What are the advantages and disadvantages of the price system?

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nyarkon | Honors

Posted September 15, 2012 at 11:15 PM via web

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What are the advantages and disadvantages of the price system?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted September 15, 2012 at 11:41 PM (Answer #1)

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In the price system, prices are used to determine what goods and services are produced and who gets them.  

There are at least two major advantages to this.  First, it allows consumers to decide which things they want to buy.  They choose to buy or not to buy a given product at a given price.  This gives them the greatest control over their economic lives.  Second, it allocates resources efficiently.  Prices send strong signals about what is wanted and what is not.  Suppliers respond to these prices automatically.  This is much more efficient than a system in which a government tries to determine what is and is not needed and adjusts production accordingly.

The major disadvantage of the price system is that it prevents poor people from getting the things they need.  Prices essentially ration goods on the basis of ability to pay.  When people cannot afford to buy necessities, they are denied access to those goods.  This can be seen as inequitable.

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