Question

How do you explain to your elected politician that market prices are important and government should not interfere with market prices?

Answer 1

If rates are kept below natural levels, assets such as expertise and money of investors abandon an industry to search elsewhere for a better return. That means less research and innovation will be available, and fewer new medicines will be available to consumers. Often this change occurs over a 3⁄4 longer period than any policymaker's career. It is therefore important that lawmakers are aware of the consequences of price controls whenever they are introduced as government policy.

Market pricing is the basic building block of economics through the complex interaction of supply and demand. Customer desires for a product decide how much of it they are going to buy at any given price. Consumers are going to buy more of a product as its value falls, everything else being equal. Industries, in effect, determine how much they want to sell at various prices. Generally speaking, if consumers are willing to pay higher prices for a product, then more manufacturers may attempt to produce the product, increase their production capacity, and conduct research to enhance the product. Higher expected costs, therefore, lead to higher supply of goods.

If the price is too high, the commodity forsale is unfair compared to what people want. This is the case with many U.S. and European farm programs; government buys the production that customers don't want in an effort to increase farm profits. It, in effect, encourages farmers to raise more cattle and transform more land into pasture or cropland. However, higher prices deter buyers from purchasing agricultural products, resulting in excess supply (e.g. a "butter mountain"). This condition is then compounded by the government continuing to buy the surplus crop at the price set.