Markets and Prices

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Markets are freedom creators. Those who view capitalism as unfair or evil, will always lean toward regulating a market, namely regulate people and prices. But prices are a beautiful thing. Prices are what allow people to gauge what they truly desire and what they are willing to give up in exchange for that. Whenever governments start regulating prices, society’s standard of living will decline. Whenever governments allow people to come to terms on their own, society will prosper: it must.

The basic law of economics is that there are scarce resources on this planet and those resources can be allocated differently because they have alternative uses. Let’s take beach from property for example.

For sake of simplicity, let’s assume there are 1000 beach front lots in your area. With a free market, only people who are willing to pay the price will be able to live there. The price will be determined by the demand for the property. As more people come into the bid for a piece of the property, they will continue to push prices up. As more land is bought up, the next piece will continue to increase in price because of its scarcity. If government comes in and puts a ceiling on prices which allows anyone to purchase the property, how are we to decide who should get that property? In that case it becomes a lottery: the government decides who gets to live there-you have given up your freedom.

We’ve seen in the past, that whenever there is  a price ceiling, it ends up being that supply starts going down because it costs more to create than it does to sell. For example, if there is no ceiling to purchase a home, the price of the home will be continually bid up until the the terms for both buyer and seller are favorable. Also the person building the home wants to work as efficient as possible to keep his costs low in order to make a profit. A price ceiling will increase demand while supply won’t be able to keep up, creating shortages. You will start seeing long lines at gas stations and produce shops when price ceilings are created.

When there is a ceiling, the costs associated with building the home won’t be covered by the set price, making home building not an attractive business or making very cheap housing, which ends up costing society more in the long run: it decreases the standard of living.

As my good friend Milton Friedman once said, “We economists don’t know much, but we do know how to create a shortage. If you want to create a shortage of tomatoes, for example, just pass a law that retailers can’t sell tomatoes for more than two cents per pound. Instantly you’ll have a tomato shortage. It’s the same with oil or gas.” I would also add that it’s the same with health care.

We need free markets. We need unregulated prices. We need people to do business with one another.

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