What Prices Can Tell Us
Written by Studio AM.
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Consider tin used in solder for joining metal parts. Suppose a mine closes, reducing supply, and the price of tin rises. Manufacturers may economize by using less, recovering scrap or choosing suitable substitutes. They can respond to the higher price without knowing the details of the mine closure.
This example illustrates an argument associated with economist Friedrich Hayek: prices can help coordinate decisions when relevant knowledge is spread among many people. A manager knows which machine is idle; a repairer knows which substitute will work. Some of this knowledge is tacit, developed through practice and difficult to put fully into words. No single report contains every local circumstance.
The price signal also has limits. A product's price may not reflect costs imposed on people outside the transaction, such as harm from pollution that the producer is not required to pay for. Higher prices also reflect ability to pay, not simply how urgently someone needs a good.
Prices are therefore useful information, not a complete account of social costs or needs. Assessing a market requires asking both what its prices encourage people to do and what those prices leave out.
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Question 1 of 4
Which best states the passage's position?
The answer is C: Prices can coordinate scattered knowledge but leave out some costs and needs.
The tin example shows coordination through prices. The later paragraphs explain missing external costs and the role of ability to pay.
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Question 2 of 4
According to the passage, what do manufacturers do when the price of tin rises?
The answer is B: They may use less tin, recover scrap or choose substitutes.
The opening paragraph lists three possible ways to reduce tin use or dependence on new supply.
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Question 3 of 4
A factory's product is cheap, but residents pay to clean water it polluted. What would the passage suggest?
The answer is A: The product's price may omit a cost borne outside the sale.
The residents bear a cost outside the transaction. A low sale price does not show that all costs are accounted for.
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Question 4 of 4
As used here, "tacit" describes knowledge that is
The answer is D: held by someone without being put into words
The passage describes practical knowledge that is difficult to put fully into words. That is the sense of 'tacit' here.
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