The government may influence the allocation of resources by producing goods and services itself. This occurs when they would not be provided adequately by the private sector, as with community goods, or when they can be produced more efficiently by the State, as with certain nationalized industries, e.g. postal services and activities of local authorities, such as the provision of roads and libraries. But other defects of the market mechanism are often dealt with by influencing the operation of the price system either by physical controls or by market intervention. The most rigid form of physical control is legislation. Controls can be flexible, however, when the authorities under general powers conferred by Act of Parliament administer them.
Alternatively, the government can avoid the rigidity of physical controls by intervening in the market itself. Thus it can adjust its own demand and supply to affect the price, as with agriculture, Treasury bills and foreign exchange rates. It may also influence demand, supply and price by indirect taxes and subsidies.
Markets (I)
'I am offered £650 for this heifer. No more offers? For the last time of asking, any advance on £650? Going at £650, going, gone.' Down comes the hammer. 'Sold at £650 to Mr. Giles on my right.' This is the local cattle market. On his stand above the cattle ring is the auctioneer. Inside the ring, a black and white heifer is appraised by local farmers and dealers. Some are buyers, some sellers. The market fixes the price at which those who want something can obtain it from those who have it to sell.
Of course, prices are not always fixed by auction. This is the method usually employed where there are many buyers but the seller only comes to the market infrequently, or wishes to dispose of his goods quickly. If there are few buyers and sellers, e.g. in the purchase of a house or a secondhand car, the final price may be arrived at by 'higgling' - the seller meeting the prospective buyer personally and bargaining with him. But where goods are in constant demand the above methods take too long. Thus most goods, such as foodstuffs, clothing and household utensils are given a definite price by the shopkeeper. But buyers will still influence this price. If it is too high, the market will not be cleared; if it is too low, the shopkeeper's stocks will run out.
Markets (II)
A market need not be formal or held in a particular place. Second-hand cars are often bought and sold through newspaper advertisements. Second-hand furniture may be disposed of by a card in a local shop window. Foreign currency, gold, base metals, raw cotton and other goods which can be accurately described are dealt in over the telephone. However, in studying the market economy it is essential to understand how price is determined. Since this is done in the market, we can define the market simply as all those buyers and sellers of a good who influence its price. Within the market there is a tendency for the same price, allowing for costs of transport, to be established for the same commodity.
What conditions must a commodity fulfill to obtain a world market? First, there must be a wide demand. The basic necessities of life (e.g. wheat, vegetable oils, wool, cotton) answer this requirement. In contrast, such goods as national costumes, books translated into little-used languages and postcards of local views have only a local demand. Second, commodities must be capable of being transported. Land and buildings are almost impossible to transport. Personal services are limited by the distance the consumer can travel. Labour, too, is particularly immobile, especially when it comes to moving to a different country. Furthermore, governments may, by import taxes and quotas, effectively prevent the entry of certain commodities into the country. Third, the costs of transport must be small in relation to the value of the commodity. Thus the market for diamonds is worldwide, whereas that for bricks is local. Similarly, wheat and oil are cheap to transport compared with coal because they are more easily handled - although, as sea transport is relatively cheap, coal mined near the coast can be sent long distances.
