Prices

Prices, and the personal freedom to set prices, make an ordered market economy possible.

Prices coordinate economic activity in three major ways:

1. Prices communicate information. The information prices communicate guides both consumers and producers to know how much they should buy or sell.
2. Prices coordinate who gets how much of any product. Resources are scarce, freely set prices are the best defense against shortages and surpluses.
3. Prices guarantee the most efficient use of resources because the incentive for profit encourages people to set the right price when they sell and to find the lowest priced alternative when they buy.

The key to the price system is guaranteeing sellers the freedom to set prices. Price controls take place when the seller is unable to freely set the price. A controlled price still communicates information through the price, but the information conveyed is distorted. Inevitably the set price will be too high or too low. Prices set too low tell people to consume too much which results in shortages. Prices set too high tell people to consume too little which often results in surpluses. Milton Friedman best established the importance of prices and the freedom to set them in Free to Choose:

"Adam Smith's flash of genius was his recognition that the prices that emerged from voluntary transactions between buyers and sellers - for short, in a free market - could coordinate the activity of millions of people, each seeking his own interest, in such a way as to make everyone better off."