Who Sets Prices?

Question: Who Sets the Prices?

Answer: Given that prices are constant with the non-POM money, that is a natural question. We are used to each owner deciding whether to accept or reject a price offered by a potential buyer for some item of his property. It is the price that determines whether the owner will receive any profit from the sale or not assuming that the other costs of providing this product are already known. Being able to decide about the prices one will accept as a seller is extremely important to property owners.

So my first answer will be unsatisfactory to most but please keep reading past that.

My first answer is that you don’t care who sets the prices. The price of a luxury item (and money can buy only luxury items, not goods or services designated "necessities" nor capital goods or services) is irrelevant to one’s reward for selling it. That is, one is not paid for producing a luxury nor capital nor necessities. One is paid for the net benefit that results from one’s actions.

We are not used to thinking that way. We are used to thinking of pay as being an exchange of service or property for money. But the new money doesn’t work that way at all. With the non-POM the only thing one ever gets paid for is net benefit. It isn’t the product nor the service that earns money, it is the benefit produced less the harm done. So what difference does the price of a luxury item make to the producer? None at all.

See, I told you that the first answer would be unsatisfying. 🙂

Let’s probe a little deeper. What person or group sets the prices? Well, it could be any person or group. But I think the most likely group would be the Payers. They have access to all the relevant information and they have a vested interest in having the price generate the most benefit for the consuming public. After all, if the public isn’t happy then the Payers can’t be happy either. Also, the Payers have access to any and all information that might be relevant. Finally, the Payers are unbiased since they can have neither money nor luxuries.

Next, let’s see what the basis should be for the price. The Payers want to maximize the rewards provided by money since those rewards are the source of the Payers’ power and importance. This gives the Payers an incentive to make the prices as low as possible so that a given amount of money will buy as many luxuries as possible. On the other hand, the lower the price, the less money the Payers will have available to credit the accounts of producers. It turns out that the optimum price from the Payers’ point of view is the cost of production. That is, the relative value of the materials and labor (skills and scarcity) required for the production of the item or service determines the price.

Let’s say a luxury item costs $10 in resources to produce and the Payers set the price of the item at $50. The luxuries and the money supply are still in balance. But, this will decrease the consumption of this item in comparison with other luxury items. Therefore, producers in the society will get less pleasure from $10 of resources than they might otherwise. But if the Payers go to the other extreme and price the item at only $2 then there will be no net benefit from producing the item to pay its producers.

From the point of view of the producer, this is a good price since if it were higher then there would be fewer buyers. If the price were lower the producer would be paid less per unit. For the producer, the maximum pay comes when the price matches the costs of production.

From the point of view of the consumer, the higher price means that he cannot buy as many. The lower price means that the supply of the item will be reduced. Therefore the optimum price for the consumer is also the cost of production.

What about when the cost of production changes? Does that change the price? No it doesn’t. If the cost of resources increases then the producers are generating less net benefit and should produce less so their pay for that production goes down. That gets the message directly to the people who need to receive it, the producers. If the producers find some way to reduce the cost of production then they are the one’s who deserve rewards.

But all this is really not the most important aspect of prices because it refers only to the prices for luxury goods and services. We have not concerned ourselves with the free market aspect of the situation. The consumers buying luxuries is not a free market at all.

One free market is between the Payers and the producers. That free market has producers selling net benefits to the Payers. Every payer can pay every producer and every producer is selling the same product, benefits. This free market works exactly like any other free market.

The other free market has Payers selling satisfaction to consumers for social rewards. Any consumer can reward (or punish) any payer. This market is completely subjective but quite powerful nonetheless.

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