Prices and the Allocation of Computer Time

Abstract

The use of prices as a mechanism for allocating resources is generally well understood. Nearly two hundred years have elapsed since Adam Smith, in The Wealth of Nations, discussed the functioning of the invisible hand in a market economy, but the principles which he enunciated have not been altered or invalidated by ensuing generations of economists. In the United States today, markets are the dominant economic form, and the price system is used to allocate nearly all the product of our private sector, over 75% of gross national product. (Governments also participate in markets, at least to the extent of obtaining resources.) To be sure, the price mechanism does not always work as well in real markets as in theory---a defect shared by other allocative mechanisms---and certain categories of goods and services continue to be allocated by means other than prices. Among these goods are most of those produced by the several levels of governments and nonprofit organizations such as universities. In addition, non-price allocation techniques are frequently used in instances when market allocation violates social canons of equity, for example during periods of rationing in wartime.