Basic Economics: A Citizen's Guide to the Economy

By Thomas Sowell | Go to book overview

Chapter 2
The Role of Prices

In a market economy, prices play a crucial role in determining how much of each resource gets used where. Yet this role is seldom understood by the public and it is often disregarded entirely by politicians.

Many people see prices as simply obstacles to their getting the things they want. Those who would like to live in a beachfront home, for example, may abandon such plans when they discover how expensive beach-front property is. But high prices are not the reason we cannot all live on the beach front. On the contrary, the inherent reality is that there are not nearly enough beach-front homes to go around and prices are just a way of conveying that underlying reality. When many people bid for a relatively few homes, these homes become very expensive because of supply and demand. But it is not the prices that cause the scarcity, which would exist under whatever other social arrangements might be used instead of prices.

If the government were to come up with a "plan" for "universal access" to beach-front homes and put "caps" on the prices that could be charged for such property, that would not change the underlying reality of the ratio of people to beach-front land. With a given population and a given amount of beach-front property, rationing without prices would now have to take place by bureaucratic fiat, political favoritism or random chance -- but the rationing would still have to take place. Even if Congress or the Supreme Court were to decree that beach-front homes were a "basic right" of all Americans, that would still not change the underlying reality in the slightest.

Prices are like messengers conveying news -- sometimes bad news, in the case of beach-front property desired by far more peo

-7-

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