The market price helps to solve the economic problem because people who want to get the goods or services have to be willing and able to pay the price. This means price addresses the 4 production decisions: “What to produce?” “How to produce?”, “How much to produce?” and “To whom distribute?”. For example, if the price of water increases, people and farmers will use water more efficiently.
Price can control the demand of goods and services, because going with the increasing of price is the decline of demand. Customers always look at the price before deciding to buy a good and when the price is high, customer’s want is less. In this diagram below, the Production Possibility Frontier curve has shifted to the right because of the decreasing in water and increasing in demand. When the price is Pe, demand is greater than supply. This means there is a shortage of water in the market. Then market increased the price to Pe1, demand now declines with the point Qe1.
In addition, the supply also can be controlled by the price. If the price increases, supply will be affected by demand and it also decreases. Because demand decreases, fewer goods are produced to correspond to demand, sellers will sell less and make supply decreases. So, the economic problem can be solved by the role of markets and market prices.
In this Production Possibility Frontier, supply curve has shifted to the left. Price has increased from Pe to Pe1 and the quantity of water was decreased in order to establish a new equilibrium.
Water in Australia is declining day by day by many. But these factors are the key element of the development in a country. So, Australian Government plans to create the water market to buy- back the water from irrigators looking to sell. In this market, water is a commodity that can be bought and sold between customers and sellers. Specifically, Australian Government’s plan is restoring the balance in Murray-Darling Basin. The purpose of this program is using the water purchase from irrigators restores the environment (Australian Government- 2010). The water buy-back also will be used in the future to protect future living standards. Another way to solve water scarcity in Australia is limited the amount of water use by increasing the water price. In this situation, price of water will be increased to reduce people’s demand, so that they may use water more efficiently. However, price of water also reduce the supply of water because of the limitation in water use. The problem of water scarcity in Australia has forced the Government making choice, the choice between using money to buy-back water for the plan “water for the Future” and using money for develop the country. But, at the end, the government realized that water is our future.
In conclusion, economic problem is our want for goods and services to consume is greater than our ability to produce those goods and services, because of unlimited want and scarce resources. Moreover, the economic problem in Australia is water scarcity. It happened as people need and cannot live without water, while water is scarce and cannot be reused or renewable. This problem is not only about the scarce of water, but also about the existence of human’s life and environment. Therefore, the role of water market was found to solve this problem. In water market, price control the demand and supply of water, so it can be used more efficiently.