Price Mechanism in a Socialist Economy: 9 Limitations

The following points highlight the nine major limitations of the Price Mechanism in a Socialist Economy.

1. The government issues directives to producers to manufacture goods of different types and in fixed quantities which are required to meet the social wants.

2. The imposition of administrative controls, regulating the supplies of goods, rationing of commodities, issuing of licences, fixation of quotas, etc. are some of the devices which tend to modify the working of an automatic price system.

3. Even the resource owners are not allowed to act freely. If the government wants the private sector to produce more for the future, then resources will be reallocated towards the capital goods sector. People may also be asked to save more and consume less in the present.

4. When the government fixes prices of goods and services of say sugar, cloth, steel, etc., and wages of workers, these act as constraints on the working of the free market mechanism.

5. Such measures as progressive income and wealth taxes, provision for social security, price support programme, giving of subsidies, credit facilities, etc., also interfere with the working of the price system.

6. Measures aimed at nationalisation of social services also tend to modify the price system in favour of mixed economy.

7. The price mechanism functions under the assumptions of perfect competition. But in the real world, competition is nowhere perfect. Producers are not fully aware of the tastes of consumers. So they overproduce some goods and under produce in the case of other goods.

They are, therefore, unable to maximise their profits. Moreover, the failure of demand and supply of goods to reach equality often leads to recession or inflation.

8. The imperfections of competition also lead to the emergence of monopolies which result in wrong pricing, incorrect and wasteful resource allocation and monopoly profits. They have weakened free competition and reduced consumers’ sovereignty.

9. The price mechanism has increased income inequalities instead of reducing them. This is because supply and demand does not work properly. Production is guided by the demand of the elite and not by the needs of the poor. Resources are, therefore, directed towards producing luxury goods for the rich who can pay the most. This further leads to misdistribution of income.