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Microeconomics Question from Walter E. Williams:Edit

Soviet planners do use open markets to permit relative prices to influence resource allocation. Briefly explain the role of prices in an economic system and the possible effects of restricting the role of prices.

AnswerEdit

Relative prices in a market system allow agents to determine the value of commodities relative to the value of other commodities as determined by the market. They also indicate the marginal cost of supplying the good. A valuable signal is sent to producers to stop producing when the cost of supplying a good exceeds the value which consumers place on having the good. When costs are unknown to suppliers, as would be the case in the old Soviet system, then producers are operating blindly. Prices cannot tell them if it is efficient to offer more or less of the good.

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