Question

What are advantages and disadvantages of the price system?

Answer 1

Advantages of the price system

1. Market efficiency. The market will be efficient because the market equilibrium is determined at the intersection of demand and supply. Resources will be used efficiently.
2. The price system assigns a monetary value to the goods and services. This will help buyers and sellers to make their choices on how many goods and services to buy or sell at that price.
3. Price system encourages competition. If goods cannot be sold at the prevailing prices, firms will exit the market and only efficient firms will prevail.

Disadvantages of the price system

1. It is difficult to assign price to public goods like clean air, water
2. The price system may encourage externalities. To keep prices low, the firms may resort to production methods that may be harmful to the environment

Some goods will not be produced because the price may be too high , for example, natural gas, electricity