Shortcomings of the price mechanism
Price mechanism operates perfectly under a perfect market. But this is not always the case. There are a number of disadvantages.
Ignorance. Prices determined by the price mechanism may not reflect the consumers' wants perfectly because of ignorance. Consumers and sellers are ignorant about all the parts of the market. They do not have enough information and knowledge. A change in supply or demand in one part of the market will not affect prices throughout the entire market. It is not necessarily the case that instantaneous adjustments occur to always maintain an equilibrium price.
Income Inequality. Pricing may not be accurate as goods go only to those people who are prepared to pay. Therefore, it is true that where the price mechanism operates, the demand structure may reflect the needs of only one particular group - a high-income group. This implies that people with low incomes have to go without some goods and services.
Monopoly. Monopoly prevents the price mechanism from operating freely. One firm might have control over a substantial amount of the supply of a particular commodity. Entry of other firms into the production of a commodity is restricted. Resources, therefore, might move towards the production of a monopolised commodity but the consumer's preferences will not be correctly reflected. Monopolies tend to be inefficient and charge high prices and this is not a true reflection of the consumers preferences.
Unemployment. Some resources remain unemployed as a result of price fluctuation. Some members of the labour force are unemployed and therefore they have to go without goods and services according to the price mechanism.
Divergence between Social and Private Benefits. Price mechanism tends to ignore the production of goods and services, which benefit the society as a whole as for instance public hospitals, roads.
The Government can provide such goods. Private individuals normally produce goods and services that are desired by the consumer and in addition, goods that are profitable. If the price mechanism were to be followed, then the economy would have to go without the basic social infrastructure. On the other hand, it might lead to a misallocation of resources. Private individuals may prefer to invest in activities like smuggling, black market, which do not benefit the society but are very profitable.
Price Mechanism cannot cope with rapid structural changes. Price mechanism cannot effect the changes required once there is any structural transformation within the economy. For instance, if there is a war, it will be the government to take a lead in the mobilization of Resources. Price mechanism cannot mobilise resources for the basic infrastructure development. Transformation of the economy requires deliberate government efforts.