One of the main functions of a price is that it carries information. What information does a price transmit? According to one theory, a price transmits information about the caprice of the buyer or the seller. Prices at the grocery store are high and wages for unskilled labor are low because fat-cat grocers and employers are just evil people. Their evil is given further expression during disasters: they take advantage of the plight of others and jack up the prices of the goods and services they have on offer. According to this theory, malevolent people charge as much and pay as little as the government lets them get away with. It’s an emotionally appealing theory. It’s also wrong.
The price of any good or service, whether it’s a bag of potatoes at the grocery store, new braces at the orthodontist, or lawn-mowing services in Memphis, is determined by the ongoing interactions of literally billions of people. At any point in time, a market price is essentially an educated guess. Consider apples that are being offered for $1 per pound at a grocery store in Memphis. In this case, people are guessing that some buyer in Memphis is willing to sacrifice any other opportunity that can be had for $1 to get a pound of apples. The price also sends a message: if you think you can use these apples to produce something for which others are willing to part with more than $1 worth of opportunities, then they are yours. Preferences can be given expression through the state or the market.
The former uses coercion, whereby one uses or threatens to use force to limit others’ options, or through persuasion, whereby one offers to cooperate in order to expand others’ options.
