Social Goals vs. Market Efficiency

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Social Goals vs. Market Efficiency
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Jump Start Chapter 6 section 3

• Which of the following is an example of a price
  ceiling?
• Minimum wage
• free lunch program
• Rent control
• Government subsidies
• Price ceilings that are artificially low are
  likely to create
• A price floor
• A surplus
• An equilibrium
• A shortage
• Price floors that are artificially high are
  likely to create
• A price ceiling
• A surplus
• An equilibrium
• A shortage
• Why might a government interfere in a market
  economy by setting prices?
• To achieve the goals of equity and security
• To insure an entrepreneurs profit
• To distort market outcomes

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Distorting Market Outcomes

• Seven Economic goals compatible with the market
  economy
• Freedom
• Efficiency
• Full employment
• Price stability
• Economic growth
• Two others Equity and Security
• Usually distort market outcomes
• One way to achieve these goals is to set
  socially desirable prices, which interferes
  with the pricing system.

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Price Ceilings

• A maximum legal price that can be charged for a
  product
• New York City does this with rent control to make
  housing more affordable.
• This can create a shortage. How?
• Affects allocation of resources

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Price Floors

• Lowest legal price that can be paid for a good or
  service
• Minimum wage
• Lowest legal wage that can be paid to most
  workers
• at 7.15
• This can create a surplus. How?

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Agricultural Price Supports

• 1930s est. Commodity Credit Corporation
• Help stabilize agricultural prices
• Used loan supports and deficiency payments
• BOTH used target price a price floor for farm
  products

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Loan Support

• Borrowed money from CCC at the target price and
  pledged his crops in return
• Led to food surpluses
• Nonrecourse loan a loan that carries neither a
  penalty nor further obligation to repay if not
  paid back

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Deficiency payments

• Check sent to producers that makes up the
  difference between the actual market price and
  the target price
• Prevented the govt from holding surplus foods
• Had farmers sell crops on the open market

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Federal Agricultural Improvement and Reform Act
(FAIR)

• Cash payments replaced price supports and
  deficiency payments
• Cost just as much
• 2002, farmers no longer receive any kind of
  payments

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When Markets Talk

• Markets talk when prices move up or down
  dramatically
• Buyers and sellers respond to changes in the
  market through their decisions

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Jump Start Chapter 6 section 3

• Which of the following is an example of a price
  ceiling?
• Minimum wage
• free lunch program
• Rent control
• Government subsidies
• Price ceilings that are artificially low are
  likely to create
• A price floor
• A surplus
• An equilibrium
• A shortage
• Price floors that are artificially high are
  likely to create
• A price ceiling
• A surplus
• An equilibrium
• A shortage
• Why might a government interfere in a market
  economy by setting prices?
• To achieve the goals of equity and security
• To insure an entrepreneurs profit
• To distort market outcomes

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