WEAKNESS OR DEFICIT OF THE PRICE SYSTEM IN AN ECONOMY
By the price system or price meachanism, we mean the method of solving the basic economic problems of allocating or distributing scarce goods among the large number of people wanting them. The price system, important as it is, is faced with a lot of defects or weaknesses
A major weakness of the price system is that it makes income distribution more uneven. Among bther things, the volume of output of a producer is determined by the amount of resources he has. The more resources a producer has, the more he is likely to produce; the more he is likely to sell, the more his income is likely to be. His sale could be more than that of another producer who has less resources allocated to him through the price system, and hence the producer with more resources, more Output of goods and more sales would have more income than that producer with less resources. Inequality of income could therefore become greater than what it was at the beginning of production.
Another weakness of the price system is its inability to operate freely in the face of monopoly. By monopoly here we mean a market Situation whereby the supply or the production of a given commodity is in the hands or under the control of a single person or a firm. No other person or firm engages in the production of such a commodity or service. The effect of this therefore is that where consumers preference would require that more resources be moved into the production of a particular commodity which happens to be under the control of the monopolist, the existence of monopoly might prevent this.
Insufficient resources might therefore be devoted to the production of the monopolized product, hence the monopolist could charge unreasonably high prices since such a price is not subjected to the pressure of demand and supply forces.
The fact that the price system tends to establish "economic partiality is a weakness of the system. The price system operates freely in the competitive market for resources where both the mono- polists and other producers buy raw materials at prices determined by the free interplay of the demand and supply forces. But the price system becomes dormant or inactive in the monopoly market and thus allows monopolist to set his price at will. It thus appears that the price system favours the monopolist more than the other producers by allowing the monopolist to enjoy an exclusive market where he can dictate prices at Will. This constitutes a weakness or a defect of the price system.
It is also a weakness of the price system that it allows misallocation of resources. The price system, it allowed to operate treely, is capable of allocating resources but it cannot ensure or guarantee the use to which the resources are put. The resources so allocated could be put into such uses that would not be in the best interest of the general public even though advan tageous to the producer who utilises such resources for the production of such a commodity. For instance, a given resources could be allocated by the price system to a producer who decides to utilise such resources tor the production of, say Indian Hemp. To the producer, it could be economically beneficial, even though illegal, but such resources could be utilised for the production fo say vegetables which would be of great benefit to the general public. The resources so allocated by the price system to the producer utilised them for the production of indian hemp is a misallocation. In this Sense, the price system is defective for misallocating resources.
