April 15, 2005

Price, a figure of singular beauty

Ivo writes:

"In fact, the beauty of the single figure, price, is that it conveys
multiple messages to multiple parties. It signals information about cost
to consumers, as well as information about relative scarcity, and
sometimes also information about perceived quality or prestige. And it
signals to producers whether, given the costs, it is economically viable
(i.e. profitable) to produce something, and if so, at what volumes
demand is most profitably supplied.

That's a remarkable amount of information in one number. It is
extraordinarily good at balancing various economic factors.

And things break extraordinarily badly if that number is fixed by the state,
because it stops conveying any information at all.

So true.

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