Government 1A, W7/L35 – Authority to Set Prices: Free Market vs the State

Writing assignment: 500 words on this topic, “Who should have the authority to set prices, the free market or the state? Why?”

    The free market should have the authority to set prices because the free market uses a feedback system to determine prices, whereas the government is just guessing. The government may have statistics, but they are relevant from the past. A free market constantly has new innovations and inventions, which statistics cannot predict.

    In a free market, prices are determined by supply and demand. How much of one product do we have, and how much do people want it? If there is a high demand for something and a low supply, it will become more expensive, because it is scarce. However, if there is a high demand and a high supply, it will become cheaper, because sellers will compete to offer lower and lower prices. This is how prices are born.

    A free market allows bidding and competition. Competition between sellers drives prices down. A better way for the state to make things fair would be to step back and allow as many sellers as possible to start selling in the market. The more sellers there are, the more effective and efficient ways they will find to produce an item, driving its price down to something people can afford. Bidding is another way to phrase this phenomenon. Sellers compete with each other to produce the lowest bid. “I will give you the item for only $__!” And other sellers compete to sell the item for even less. In a free market economy, lowest bid wins.

    One argument for why the government should have the authority to set prices is that the state will make it fair. The state will make sure that certain items will stay at a certain price so that people can always afford them, and that is fair. But that only makes things worse. Price controls create gluts and shortages, which only makes it harder for people to obtain them. When the state applies price floors in an attempt to stop prices from falling too low, the quantity supplied exceeds the quantity demanded, because it becomes too expensive for people to buy. People have budgets, and they cannot spend more on an item than it is worth every time they need it. This results in an oversupply of the product. Similarly, price ceilings try to keep prices from getting too high, but since the price is always low no matter how much a business produces, the business loses the incentive to produce. The business stops producing and people no longer have access to that item. Price floors create gluts, and price ceilings create shortages.

     A free market can determine prices through bidding, competition, and supply and demand. The state can only guess what price would work, or look at their statistics, which are set in the past. If the free market is always shedding light on new inventions and innovations, how can statistics keep up?


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s