ABSTRACT
The following pages are an exercise in the analysis of the dual function of the price mechanism. The price of a commodity or of a factor of production is a determinant both of the use which will be made of that commodity or factor of production and of the real income which the owner of the commodity or factor of production will receive as a result of its sale. These we will call the ‘efficiency’ and the ‘distributional’ aspects of the price. As is well known to all professional economists, relative prices properly used either in a competitive market or else by a planning authority can help to guide the economic system to an ‘efficient’ use of resources, that is to say, to a state of affairs in which resources are so used that it would be impossible to make one citizen better off without making any other worse off. For if a high price is charged for scarce resources and a low price for plentiful resources, their users will always try to satisfy their needs in ‘efficient’ ways which use relatively little of the scarce resources and relatively much of the plentiful resources; and this will be true whether the users be entrepreneurs buying materials and other factors of production as inputs into some productive process or whether they be housewives buying consumption goods and services. But such an ‘efficient’ system may, of course, lead to a very undesirable distribution of real wealth. If citizen A owns nothing except a factor (e.g. his own unskilled labour) whose price is low and needs for his family's welfare goods whose price is high, he will be very poor, as compared with citizen B who happens to own a factor (e.g. a scarce natural resource) whose price is high and who happens to need for his family's enjoyment goods which are very cheap.
