Markets play a basic role in economic welfare. In rich countries life would be unimaginable without access to a wide array of reasonably well functioning markets, from food to credit and insurance. It is almost never the case that a rich-country household has to produce something in order to consume it, or that its members cannot sell their labour for a salary or wage. Credit markets function for small businesses and farms to finance investment projects, credit cards can be used to help households cover income shortfalls and insurance markets help protect people from unexpected income and health shocks.
Access to markets is just as compelling for a poor rural household in Rwanda, India or Peru. Without good access to markets, a poor household cannot market its produce, obtain inputs, sell labour, obtain credit, learn about or adopt new technologies, insure against risks, or obtain consumption goods at low prices. Equally important, it cannot use its scarce resources like land and labour efficiently. Its decision making is constrained. Cut off from markets, it is forced into self-sufficiency, whether for food, labour or other items. Its own subjective valuations, rather than market prices, then determine how its resources are used.
Consider, for example, a poor farmer who can produce high-quality berries at a low price. In town, exporters are willing to pay 20 cents a basket for berries like the ones he can grow; however, poor roads and information about buyers make marketing this perishable crop too expensive and risky. So the farmer produces a few baskets for his family's own consumption and he spends the rest of his time doing low-wage work, when available, on a nearby ranch. A basket of berries costs him 10 cents to produce. Implicitly, then, this is his decision price, or the price at which he is willing to produce berries. If he could become part of the export supply chain, his decision price would increase to the market price. He could be more efficient, shifting some of all of his time from low wage work to berry production and he would have an incentive to invest in his farm. Most importantly, he could generate badly needed cash for his family.
When a household's production and consumption decisions are based on subjective valuations instead of market prices, the household can reap gains, perhaps significant ones, by acquiring better access to markets. For example, without access to a labour market, a poor family's time may be "trapped" in low-return activities on the farm instead of being sold for a wage in higher-return activities on another farm or at a business in a nearby town. When high transportation costs or marketing risk keep a farmer from selling a cash crop, her fallback is to produce a lower-value crop that can be eaten at home. When a farmer cannot obtain fertiliser or hire labour at the times needed, or when he lacks the cash to pay for these inputs, less land is sown, output falls and more productive technologies may not be adopted. Efficiency is critical, because even a small income gain can make a significant difference for an impoverished household.
