The price system is an economic mechanism that uses the prices of goods and services to allocate resources and signal information about supply and demand in a market. It operates on the principle that prices are determined by the interaction of buyers and sellers, which helps coordinate economic activity and inform producers about what to produce, in what quantities, and at what quality. The efficiency of the price system is crucial in addressing the knowledge problem, as it allows for decentralized decision-making and the dissemination of localized information.
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