can do lot of tinkering with the pricing 

 system to improve resource allocations. 

 But we must not conclude, as do some 

 economists and many noneconomists, that 

 we should throw out the pricing system 

 because it does not work perfectly. My 

 conclusions are that the pricing system 

 is the best thing we have going for us 

 in terms of allocating goods and ser- 

 vices. What we need to do is to identify 

 long-range concerns with respect to 

 overall goals and select those areas 

 where market prices seem incompatible 

 with social needs to do some tinkering 

 with the pricing system. 



For economic efficiency we must 

 maintain a reasonably effective system 

 of market pricing. There are several 

 theories with respect to what a market 

 price is. In a competitive economy a 

 market price is one which no individual, 

 no firm, no government agency can affect 

 by itself through its buying or selling. 

 In other words, it is all of the deci- 

 sions made in the economic system as a 

 whole which determine the market price. 



We do have a few situations of op- 

 erating competitive market price systems 

 that work fairly well. The wheat market 

 is about the best example of a competi- 

 tive market system one can find since 

 there is no buyer nor any individual 

 farmer, by himself, that can affect the 

 price of that commodity. However, as we 

 move into more restrictive market struc- 

 tures, we start tinkering with this com- 

 petitive market price. Some of the tink- 

 ering we do deliberately to effect pub- 

 lic policies, or to effect preferences, 

 or to accomplish goals other than the 

 allocation of goods and resources. In 

 the economics profession, the model we 

 use is the perfectly competitive econ- 

 omy. That is the model on which our 

 theoretical base rests. 



The opposite of the competitive 

 model is the monopoly or the single firm 

 situation in which the firm, the indi- 

 vidual, or the government by its own de- 

 cision controls the price for a commod- 

 ity by controlling the amount that is 

 offered for sale. In this monopolistic 

 situation, the prices are generally 

 above both the average cost and the mar- 

 ginal cost of production. Therefore, we 

 have a disequilibrium when measured 

 against the competitive model. A dis- 

 equilibrium exists since the monopolist, 



in controlling the amount of output and 

 affecting the price, can obtain excess 

 profits from the enterprise. 



There are certain industries with 

 such unique characteristics that they 

 are natural monopolies. That is, it 

 would be uneconomic or inefficient to 

 allow, for example, public utilities to 

 compete with each other in the open mar- 

 ket. We would have power lines all over 

 the place. These industries are desig- 

 nated as natural monopolies which we 

 control by government intervention by 

 regulating their economic activities. 

 This is one of the first areas where we 

 have government intervention or tinker- 

 ing with the price system. The govern- 

 ment issues an exclusive franchise to 

 serve a certain segment of the popula- 

 tion or State or municipality. In ex- 

 change for that franchise without compe- 

 tition, the government regulates the 

 prices charged. 



This creates an inflexibility or a 

 rigidity in which adjustments are not 

 easily made for changing conditions. 

 Any needed changes are costly, ineffi- 

 cient, and vigorously opposed by incum- 

 bents. If one does not believe this, 

 one can read some of the newspapers 

 about problems of the Administration's 

 efforts to deregulate the airline and 

 trucking industries which have been pro- 

 tected from competition. A power utility 

 with a franchised area is certainly not 

 interested in deregulation. The indus- 

 try enjoys regulation because it has a 

 guaranteed return on investment, and 

 that is something the wheat farmer in a 

 competitive market does not have. 



Those are the two extremes. There 

 are other ways in which we tinker with 

 the price system, especially through 

 what I refer to as administered prices. 

 We live in a system of administered 

 prices. The environment for administered 

 pricing is one in which we have a few 

 firms or a group of firms or an industry 

 in which people can either get together 

 or, perhaps, because of the structure of 

 the industry, intuitively determine a 

 pricing scheme which is higher than a 

 competitive price. Let me illustrate 

 how we tinker with prices to change the 

 value of goods in a market to better 

 understand the value system for marsh- 

 lands and the pricing system from the 

 perspective of the economist (Figure 1). 



157 



