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[FOUNTAIN]Price restriction not answer

Published: 20 Nov. 2006, 23:16

Price is the value of a commodity and service that is noted in a certain currency. All commodities and services must have a price given to it in order for it to be traded. Whether it is the seller or the buyer, people make up their mind according to the price. Price is what Adam Smith called the “Invisible Hand” and is the key element of a market economy. If there is no given market price, absurd and extraordinary events occur. In the past Soviet government, there was no such thing as price. Although there was something called the price, it was merely a number the government had put up. Since there was no market, the compensation for the suppliers was given by the guideline of the government, not by the market price. In the early periods, the glass factories were given compensation according to the width of the glass produced. The glasses produced were all too thin and broke easily. Then the government changed its compensation guidelines for weight. The factories then produced heavy glasses that were too thick for people to even look through. This incident proves that width or weight cannot substitute for the function of market price.
Professor Thomas Sowell of Stanford University said, “Prices are like a thermometer reading.” When the price of a product rises, it means there is more demand for the product. In a market economy, people will either increase the supply or decrease the demand. If the price keeps falling, it means there are too many of the same products. Then of course the demand will rise and supply will increase. It is like how people determine demand for air-conditioning or heat by reading the thermometer. The price is the signal that moves the economy.
Recently as cabbage prices fell, farmers have plowed over their cabbage harvest. The farmers may feel bad when plowing over their year’s harvest, but on the production side, it is a rational action of trying to maximize one’s income by reducing the supply reacting to the price thermometer.
What happens if someone tries to reduce a price by force like the apartment prices? People will reduce the supply and increase the demand by reacting to the false thermometer.
As a result, people will face a lack of supply, buyers of new apartments will create heat, the price will go up again. This is why restricting apartment prices will worsen the situation rather than solve the problem of rising real estate prices.
Keeping Sowell in mind, restricting prices is like reducing the temperature on a hot day by putting ice on the thermometer. It doesn’t make the heat go away.

*The writer is an editorial writer
of the JoongAng Ilbo.

by Kim Jong-soo