What are the conditions necessary for the success of price mechanism ?

The price system would work more smoothly and efficiently for success when certain conditions are present.

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1. The first requirement for the success of price mechanism is com­petition. In the design of the system this is fundamental- As Hayek says, “The price system will fulfill its function only if competition prevails, that is, the individual producer has to adapt himself to price changes and cannot control there.

2. Costs should be a true measure of the sacrifices made by the society in the production process. Costs of production should not only take into account the private costs of production but also the social costs.


3. There should be perfect geographic and occupational notability of human and other resources. Resources should freely move into the channels as signalized by demand. This mobility should be quick.

4. While allocating productive resources, business firms should be-correct in anticipating what would be the demand for their products in the future.

5. The price system should be given freedom of operation, “There should be no interference by the state. Nor should impediments be imposed on its free functioning by the monetary system. There should be a free flow of resources into the productive channels in an automatic manner. For example, the imposition of various administrative controls like rationing etc. to regulate the supply or licensing system, fixation of quotas, etc., put constraints on the free functioning of the price mechanism.

6. Demand should perfectly reflect the needs of the people. Other­wise as production follows demand, there is the possibility that resources. would be misguided into wrong priorities. This is possible when economic inequalities are within tolerable limits.


7. Today even in a capitalistic country the state performs certain functions to promote social welfare- Thus various social security measures, giving of subsidies or price-support policy, etc., act as restraints and modify the working of the price system.

8. A policy of nationalization or an expansion of the public sector will impair the free working of the price mechanism. Samuelson has criticized this move when he observes, “A price system is not perfect, “but neither are its alternatives.

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