When policymakers set prices by legal decree, they
a. improve the organization of economic activity.
b. obscure the signals that normally guide the allocation of society’s resources.
c. are usually following the advice of mainstream economists.
d. are demonstrating a willingness to sacrifice fairness for the sake of a gain in efficiency.
The correct answer is b. Obscure the signals that normally guide the allocation of society's resources.
To arrive at this answer, we need to understand the concept of price as a signal in an economic system. Prices in a market economy are determined by the interaction of supply and demand, reflecting the scarcity of goods and services. These prices serve as signals to both producers and consumers about the relative value and scarcity of different goods.
When policymakers set prices by legal decree, they interfere with the natural market process. This can distort the signals that prices send to producers and consumers, leading to disruptions in the allocation of resources. For example, if prices are set below the market equilibrium level, it can create excess demand and shortages. On the other hand, if prices are set above the market equilibrium level, it can create excess supply and surpluses.
Therefore, when policymakers set prices by legal decree, they obscure the signals that normally guide the allocation of society's resources. This can have unintended consequences and inefficiencies in the economy.