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I was asking a buddy a question about pricing and he said that you can't control your own pricing.

The context to this question was, I said if you tax firms more, then they're going to raise the prices on their products to make up for the taxes. My friend said that they don't not make up their own prices; the government does.

Is this a true story about who controls pricing?

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In US for most products government does not set prices (although there can be exceptions).

People are free to set whatever prices they want, but in the end prices are set by market. In a perfectly competitive market if a firm sets price higher than market price nobody will want to buy goods from you and since in competitive market the prices are already equal to marginal costs if you set lower price you will get bankrupt.

In markets that are not perfectly competitive firms can adjust their prices to the extend they have market power but unless you are monopoly facing completely inelastic demand you can’t operate a successful business charging whatever price you want.

A wealth tax does not have direct effect on good prices but there could be some secondary effects. Wealth tax for example encourages capital flight, and could discourage entrepreneurship so that there is less competition in the market, giving firms higher market power and allowing them to set higher prices compared to pre-wealth tax equilibrium.

This being said since wealth tax was not tried too often in recent history and any trials in Europe were extremely short and had some major design flaws, it’s hard to provide some complex evaluation of wealth tax. Effects on consumer prices in this setting are not well understood yet, or maybe I should rather say the magnitude these effects is not well understood.

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This might be a basic answer not befitting Stack Exchange (but it's a basic question):

Everyone does.

You want to buy things for a price as low as possible. You want to sell things for a price as high as possible (you probably only sell labour, unless you run a business). Those two pressures find a balance at some particular price, and that is the price.

Anyone can open a store that charges \$30 for a loaf of bread, but nobody would buy one. Anyone can walk into a store and try to give them \$0.10 for a loaf of bread, but nobody will sell one. Somewhere in the middle, there are prices where you want to buy bread, where the store also wants to sell bread. They can charge any price in that range.

Why wouldn't they charge the highest price they can get you to pay? Two reasons:

  1. Different people are willing to pay different prices - it might be if they make the bread 50 cents cheaper, they sell a bunch more bread to make up for it.

  2. Stores compete with each other - it might be that if they make the bread 50 cents more expensive, you'd still pay it if you had to, but you don't have to because it's 50 cents cheaper at the store next door.

If you think about it too hard, it's amazing that things actually work this way. I remember hearing once that after (or maybe just before) the USSR fell, some USSR government employees who were in charge of setting prices visited Britain, and they were confused by how the economy could possibly work in such a disorganized fashion. Yet here we are and it works.


In the context of taxes, it is somewhat true that taxes tend "spread out". If you tax stores more, for example, stores will charge higher prices—they have to, or they wouldn't make a profit any more—so you'll end up paying more for bread. Even though you wanted to tax owners of stores, you ended up taxing everyone. It's not entirely true, because the tax money can come partially from higher prices and partially from lower profits at the same time.

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