In my experience, policy makers are reluctant to use the price mechanism to allocate resources even when they know that the price mechanism can achieve the desired policy objectives. It is a puzzle.
A dozen (well-known) limitations of the price mechanism are that: (i) there is no such thing as a perfect market, (ii) sellers can influence prices, (iii) competition coupled with economies of scale can lead to monopoly, (iv) price adjustment is not necessarily automatic, (v) consumer sovereignty is a myth, (vi) the price mechanism can cause instability, (vii) markets can fail, (viii) the price mechanism does not capture intangible costs, (ix) wastage of resources can occur, (x) the price mechanism ignores collective wants, (xi) the price mechanism works against the production of merits goods, and (xii) the price mechanism can breed inequality. (Of course, the price mechanism has advantages too.)
Apart from its limitations highlighted above by Oliviet, the main objective of government or governance( i.e ensuring and enhancing the social well-being of the citizens) might not be achieved under such economic paradigm.
When the "market" decides politicians and political parties feel like they lose power and power is their first priority. Ultimately it is all about power whether one lives under a communistic, socialistic, or capitalistic structure. We just need to remember that the "stated" reason given for a decision may not be the same as the "real" reason ..:-).
Most policy makers have taken Econ 101 and are familiar with the strengths and limitations of the price mechanism. I am thinking of cases where the price mechanism is CLEARLY superior, and there is no obvious disadvantage. For example, to conserve water (or electricity), raising the price of water works compared to public campaigns to exhort people to take fewer showers. The standard counter argument is that the price increases will hurt poor people. I then respond that we should give tradeable coupons to the poor people.
To include price mechanism in policy making is ideal. yet it may not allow for the policy to be properly implemented.
Price of commodities or services determines the demand, even when supplied adequately.
When policy makers fix prices that are outrageous for the reach of the poor, only the more priviledged will partake in the demands while the poor may not have the capacity.
Price mechanism is not necessary in allocating resources.
Policy must also consider equity which may not mesh with price mechanism. Protecting ALL citizens is not a business decision. where there is no conflict price mechanism can be and is used however government is not business so the goals and proprieties are different.
I agree that equity is an important concern. We can use the price mechanism, and then provide direct assistance to the disadvantaged.
In my experience, this option is rarely considered. In the name of equity, the possibility of the price mechanism is ignored.
In some cases, there are no obvious equity considerations. Maybe it is politics.
The reality is that capitalism and its reliance on market concepts is the only thing that can adequately fund social programs. Many countries that people think are socialistic are not really socialistic at all. While it is true that those countries have extensive social programs those programs are funded by capitalistic enterprises that employ the market concept. Take away the market and capitalism and social programs cannot be funded and the people at all levels suffer the consequences. The most radical economic revolution in world history was started without a shot being fired ... November 9th, 1989. The U.S. and other countries need to learn from that example.
I am not sure that the market system is the ONLY thing that can adequately fund social programs. We have to assess the strengths and weaknesses of different models from around the world.
Are they? Not all. Many governments are keen to leave resource allocation (and the attendant price mechanism) to the market. The USA is one. As a Weberian state, the USA tends away from the market compared to most of the world. That is true, irrespective of the colour of the regime. So, we must ask, why do some states seek to influence the market? Look at history, and you will see complex strongly non-ergodic countries that need state control for progress. Cf.Article Public-Private Partnerships (PPP) on Moulding State Structur...
Paul: The answer is twofold. First, economists know that markets generally work best when the forces of supply and demand are left alone to determine price (without government interference).
Second, once price controls are imposed by the government, it is extremely difficult (if not impossible) to remove them. History tells us that price controls are almost always permanent.
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