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What are the Limitations of Price System?

Here we understand about the Limitations of Price System in detailed.

What are the Limitations of Price System?
There are Many ways that markets fall short of efficient perfect competition. These are known as limitations of price system. These limitations are as follows:
  1. Imperfect Competition: It is one of the main limitations of price system. Here, under perfect competition, no firm or buyer can influence market price individually, imperfect competition occurs when a seller or buyer is in a position to influence the market price to his profit. When imperfect competition arises, society moves inside the production possibility curve. Almost all industries contain some degree of imperfect competition.
  2. Public Goods: These are goods which cannot be bought and sold in markets. Production of these goods in the private sector is impossible because the benefits are dispersed among the people and no individual can be forced to pay for it. National defence is best example of it. When a nation protects its soverignty and freedom, it does so for all its inhabitants they want the protection or not and whether they pay for it or not.
  3. Externalities: It is also one of the main limitations of price system. Inefficiency arises also when there are externalities which involve involuntary imposition of costs and benefits. For e.g, airports produce lot of noise, airlines do not compensate the people living around the airport for disturbing their peace.
  4. Inequality: If the economy functioned most efficiently remain always on the production possibility curve and never inside it, it may still lead to an undesirable outcome. Because a free market economy may not produce fair distribution of income. Incomes are determined by a wide variety of factors such as education, effort, inheritance, luck, etc. Goods follow rupee votes in the market, unfair distribution of income will result into unfair allocation of resources in the economy.
  5. Constraints placed by the Government: In real situation, price system is not allowed to function freely even in free market economies in the present day world. For instance, (i) When the government fixes prices of goods and services like sugar, edible oil and foodgrains and wages of workers, these act as constraints on the working of free price system. (ii) Measures as taxes and subsidies, credit facilities and provision of social security also interfere with the working of price system. (iii) Nationalisation of banks and industries will also change the results of the working of price system.
What are the Limitations of Price System?
Imperfect Competition
Externalities
Public Goods
Inequality
Constraints placed by the Government
Evaluation of Price Mechanism- Limitations of Price System.
Kinnari
Tech writer at NewsandStory
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