Question

“Prices contribute to the efficient production and distribution of goods and services by embodying vast amounts of knowledge not available to any individual… prices lead to social outcomes that take account of procedures’ costs and consumers’ preferences in ways that no individual planner could plan to accomplish”

Questions:

1.
Outline the various roles played by prices in a market economy.

2.
In what way does the presence of externalities result in price information being “inaccurate”? Illustrate your answer by considering:

3.
The case of research and development expenditures, and

The problem of traffic congestion.


Take a shot, what roll do prices play in the allocation of scarece resources, and how do externalities effect observed prices.