Sunday, April 26, 2009

Free Markets (18) - Information and Efficiency

Producers and consumers need good information to make wise decisions. Markets do not make decisions, but they are excellent conveyors of information. To make sales, producers must share information to the market about the products and prices they are offering. Consumers and producers can use this information to enlighten their decisions.

Prices draw consumers towards the most efficient producer. If two sellers are offering exactly the same a product, but one offering a much lower price than the other, a wise consumer will accept the best offer. The efficient producer will be encouraged to produce more. The offers of inefficient or greedy producers will be rejected. They are not forced to change, but they will feel the pressure, if the want to sell their products.

Prices provide producers with information about the value of the resources they have used. This information flows right through the economy from extraction of raw materials to the retailing of final goods. Wise businesses respond to market information by adapting their production processes to eliminate waste and increase efficiency.

Markets do not “work all things together for good”, but they do convey some of the information that people need to make good decisions. Market information will never be perfect and it will never be complete, but the wisdom of consumers and producers would be severely constrained without it.

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