Econ 101: Prices Are Information | This Week's Economy Ep. 121
Basic misunderstandings of prices lead to terrible consequences.
Hello Friends!
It’s time to set the record straight on prices. They’re not just random numbers set by sellers—they’re powerful signals that reflect what the market is willing to pay for goods and services.
But when the government steps in—through price controls, subsidies, or bailouts—those signals get distorted. This results in market confusion, unintended consequences, and long-term economic harm.
In this episode of This Week’s Economy, I break down why prices matter and why policymakers need to tread carefully. Watch the full episode on YouTube, Apple Podcast, or Spotify, and visit my website for more information.
Lesson 1: Nothing Is Free
Quick Lesson:
Nothing in life is truly free. Every decision means you give up something else. Every dollar spent—whether by individuals or governments—comes from somewhere. Despite political promises, opportunity costs are real. Every choice involves trade-offs, yet policymakers often ignore this basic economic principle.
“… that is the free lunch myth, the myth that somehow or other government can provide goods and services… at nobody’s expense.” – Milton Friedman
Real-World Examples:
Opportunity cost means choosing one thing means giving up something else. It’s the value of the next best alternative you forgo when making a decision.
Whether it’s “free” college to “free” COVID tests, the cost doesn’t vanish. Usually, it’s paid by current taxpayers, or worse, borrowed from future generations.
Why It Matters:
The illusion of “free” government services is a dangerous myth. When costs are hidden or deferred, accountability disappears. Recognizing opportunity costs helps us evaluate policies more honestly and ensures we don’t pass the bill to the next generation.
Lesson 2: Where Do Prices Come From?
Quick Lesson:
Sellers set prices, but they don’t place them in a vacuum. For the market process to work, the resulting price must reflect how much buyers value the good or service. Prices aren’t arbitrary; they’re signals that emerge from the marketplace based on supply and demand.
“Prices adjust to equate how much people want to buy with how much they want to sell.
And if people want to buy more than they did before, prices rise. If people want to sell more than they did before, prices fall.
Supply and demand. Buyers are competing with each other. Sellers are competing with each other.
The prices we observe emerge from this competition.” – Russell Roberts
Real-World Examples:
Prices contain valuable information. They reflect scarcity, demand, and shifts in the marketplace—all in a single number.
But when governments interfere—through subsidies, taxes, price controls, etc.—they distort these signals. The results are shortages, surpluses, and inefficiencies. Consider the challenges in housing, healthcare, or education.
Why It Matters:
When prices are allowed to work freely, people respond. They conserve, innovate, and reallocate resources—doing more with less. That’s not just theory. It’s how markets turn scarcity into opportunity.
3. Why Do Prices Matter?
Quick Lesson:
In a free market, prices coordinate millions of decisions without the need for central planners. They tell us what's scarce, what's in demand, and where resources should flow. Prices signal value, and people respond by innovating—finding better ways to produce, trade, and serve. That’s how opportunity costs turn into real opportunities.
“To the despair of every economist, it seems almost impossible for most people other than trained economists to comprehend how a price system works. Reporters and TV commentators seem especially resistant to the elementary principles they supposedly imbibed in freshman economics.” – Milton Friedman
Real-World Examples:
Price distortions—such as drug price controls or green energy subsidies—lead to shortages, surpluses, and market dysfunction.
Tariffs aren’t clever negotiations; they’re taxes. They raise prices on consumers, slow growth, and invite retaliation from trade partners, distorting the natural flow of supply and demand.
Why It Matters:
When people are free to act in markets—guided by prices and supported by strong institutions—scarcity becomes a catalyst for innovation and abundance. Instead of a scarcity mindset that calls for control or redistribution, we need a prosperity mindset—one rooted in freedom, voluntary exchange, and personal responsibility.
4. APPLYING PRINCIPLES TODAY
Price Controls and Subsidies:
The Inflation Reduction Act effectively imposed price controls on some prescription drugs. That may sound like savings, but it limits innovation by drying up funds for new treatments, while inserting more bureaucracy between patients and doctors.
Subsidies aren’t free. They come from taxpayers and often skew incentives. Green energy advocates rightly criticize oil subsidies—but then champion subsidies for their favored industries. This is a case of political favoritism, not sound economics. It allows politicians to pick winners and losers, undermining the very function of markets.
Other Distortions:
Bank bailouts encourage moral hazard, signaling to firms that they can take reckless risks without consequences. A better approach is clear, market-based bankruptcy procedures that ensure no firm is "too big to fail," protecting taxpayers and promoting accountability.
Trump-era tariffs have raised consumer prices and created uncertainty. That uncertainty makes it difficult for businesses to plan and price effectively, breaking down the information-sharing function of a healthy price system.
Texas:
Governor Abbott recently approved at least $1.5 billion in taxpayer money for Hollywood studios to produce state-approved films over time. This policy creates short-term jobs but no lasting benefits, diverting public funds from small businesses and ordinary Texans to wealthy entertainment corporations.
On the positive side, Texas lawmakers rejected HB 4124, a proposal to ban interchange fees on taxes and tips. While it may have seemed narrow, it was a form of price control, and price controls rarely stay small. Left unchecked, they grow and sink the whole ship.
Final Thoughts
Prices are more than numbers—they’re knowledge. In a free market, prices communicate information about value, scarcity, and demand. But when the government intervenes with price controls, subsidies, bailouts, or tariffs, that knowledge is distorted.
We must let markets do their job. Let prices work to let people prosper.
RESOURCES
Here are some recommended resources to dive deeper into studying economics:
Price Theory by Milton Friedman
Where Do Prices Come From? by Russell Roberts
What is Opportunity Cost by Marginal Revolution University
What Do Prices "Know" That You Don't? by Learn Liberty
Thanks for joining me in this week’s episode. For more resources and commentary, visit VanceGinn.com and subscribe to my Substack at vanceginn.substack.com. God Bless You! Let People Prosper!
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