Disadvantages/Demerits of price mechanisms

Disadvantages/Demerits of price mechanisms

  1. It promotes income inequalities.  This is because   the more   resources   you have, the more the income.  Therefore   people who do not have resources   remain poor thereby   widening   the income gap.
  2. It leads to monopoly tendencies in the economy. This   is because   the large   efficient   firms (producers)   may force  the inefficient  firms  out of the production   process  through  competition   and as  a  result,   they   end   up  restricting    output   and   charging    high   prices   hence   exploiting    the consumers.
  3. This system   does not cater for public goods which   are collectively    consumed   and that are expensive   to produce.  For example security, roads etc. This is because such public goods are not profit making.
  4. It leads to unemployment. Producers aim at maximizing profits   and minimizing   costs and in the process,   they end up using  capital  intensive  production   techniques   which  leads  to technological unemployment.       In addition,   unemployment    can also be due   to inefficient    firms   being   out competed   from the production   process and workers from such firms remain unemployed.
  5. It leads to fluctuation in incomes of sellers. Individuals   selling umbrellas   and rain coats, their incomes   are high  during  the rainy  season  and Iow  during  the  dry  season  which  makes  planning difficult.
  6. It promotes the production   of socially harmful products.   For example   cocaine,   marijuana, alcohol,   cigarette   if not restricted.     This is because   such commodities’   may be fetching   high profits to the producers.
  7. The system undermines the provision of basic and cheap essential goods and services which are non-profit making.  This is because   the private individuals   aim at venturing   in activities   in which they maximize   profits.
  8. It leads to over exploitation of natural resources. Due to competition in production   and lack of government   control, the producers   may want to produce   more  output’  hence  over  exploiting   the resources.
  9.  There is consumer’s ignorance due to market imperfections
  10. High competition is always wasteful as it leads to duplication of activities
  11. It leads to exploitation of the population
  12. It encourages speculation and gambling
  13. It makes government planning difficult
  14. Price mechanism fail to project future needs
  15. Excessive price fluctuations
  16. Failure to respond promptly to immergences such as war and catastrophes.

 

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