it is directed toward achieving an equi- 

 librium. The economic concept of supply 

 and demand requires a price. Without a 

 price one has no supply and demand func- 

 tions—merely physical production and 

 consumption. the economic concept of 

 supply and demand must include a price. 

 The simplest exchange system in the 

 world is a barter system where there is 

 no cost of exchange. However, in a com- 

 plex society where the producers are far 

 removed from the consumers, one has 

 large costs of exchange. I think this 

 is one of the larger problems we face in 

 the economy today. People are disgrun- 

 tled with the high cost of exchange, the 

 high cost of moving a tomato from south 

 Florida to New York City. People cannot 

 readily understand costs of exchange. 

 Many people would very much like to see 

 if we could not do things a little dif- 

 ferently in the exchange system. That 

 is, could we go back to a simpler econ- 

 omy in which the costs of exchange could 

 be reduced? I do not see much hope for 

 reduced exchange costs. Most of us would 

 not accept a primitive economy. We like 

 luxuries too much to revert to spending 

 so much time producing directly what we 

 consume. The exchange system governs 

 the allocation of resources. 



The positive economist accepts the 

 premise that the existing allocation of 

 resources and goods and services is 

 acceptable. We allocate goods and re- 

 sources in the relatively competitive 

 economy through the ownership or control 

 of those resources. The economist looks 

 at four basic groups or categories of 

 resources which are familiar to all: 

 land, labor, capital, and management. 

 In land, we include all of the natural 

 resources, the renewable resources, such 

 as wildlife, and nonrenewable resources 

 such as extractive minerals. These nat- 

 ural resources are embodied in the econ- 

 omist's concept of land. The ownership 

 of land and the resulting allocations 

 are accepted by the positive economist 

 as a fait accompli including the rents 

 that are paid for land. The rent is the 

 price for the use of that land. The 

 rents that accrue to land are the method 

 of allocating a part of the total goods 

 and services of the economy to the own- 

 ers of land. 



The same is true of labor. Most of 

 us sell our labor, which includes the 



technical skills we have. In fact, most 

 of us in today's society have little to 

 sell except labor. As we sell our la- 

 bor, goods and services in the economy 

 are allocated to us on the basis of our 

 ability to command a price for our la- 

 bor, a wage if one will. 



Of course the owners of capital, 

 essentially investors, receive the in- 

 terest, and management receives the 

 residual or profits, or various other 

 forms of compensation which might result 

 from the ownership of the particular 

 technical skills required to combine the 

 land, labor, and capital into a produc- 

 tive operation. 



The heart of all this production, 

 consumption, distribution, and alloca- 

 tion is a price system. What I would 

 like to point out is that there are 

 other ways of allocating besides a price 

 system. We can allocate by law; we can 

 legislate. We do a lot of that. We de- 

 velop a policy or a standard or we pass 

 a law. For example, the national efflu- 

 ent discharge permit system is a policy 

 which affects allocation of resources. 

 In this case, resources are reallocated 

 from the private users of products to 

 the public sector. Costs of effluent 

 disposal are subsequently passed on to 

 the consumers rather than being absorbed 

 by the reduction in fishery habitat. 



The ultimate legislated allocation 

 of goods and services would be in a cen- 

 tralized economy, wherein one just pass- 

 es down a budget or sets an arbitrary 

 price or allocates goods and services on 

 whatever premises may be arbitrarily 

 judged appropriate. The two polar posi- 

 tions are the laissez-faire of a free 

 market allocation system y_s_. the cen- 

 tralized government allocation system. 

 These are the two extremes of allocation 

 systems, both of which must have a pric- 

 ing system for balancing needs and sur- 

 pluses, demands and supplies. The pric- 

 ing system is often referred to errone- 

 ously as being inaccurate or inappropri- 

 ate. The pricing system is not perfect. 

 I will try to explain some of the limi- 

 tations of pricing systems so that we 

 can understand how to better use prices 

 as a guide to resource allocations. 



The problems in the pricing system 

 are most noticeable in areas of natural 

 resources and environmental concerns 

 where markets are not well-defined. We 



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