Economist Friedrich Hayek argued that which of the following can serve as signals in an economy?

• A. Tax rates
• B. Government regulations
• C. Production quotas
• D. Prices

Answer: (D)

Verified step by step guidance

1. Understand the role of signals in an economy: Signals are pieces of information that help individuals and firms make decisions about production, consumption, and resource allocation.
2. Recall Friedrich Hayek's argument that prices serve as signals in a market economy because they convey information about scarcity, demand, and supply conditions without the need for centralized control.
3. Analyze why tax rates, government regulations, and production quotas are not considered signals in Hayek's framework: these are typically imposed by authorities and do not spontaneously reflect market conditions.
4. Recognize that prices adjust based on changes in supply and demand, guiding economic agents to respond efficiently, which is why Hayek emphasized prices as the key signals.
5. Conclude that among the options given, prices are the correct answer because they naturally communicate information necessary for coordinating economic activity.