Social Goals vs. Market Efficiency

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 Why might a government interfere in a market economy by setting prices? To achieve the goals of equity and security To insure an entrepreneur’s profit To distort market outcomes To allow the price system to transmit accurate information What is meant by the phrase “markets talk?” Market changes are written about in newspapers and magazines Government officials base decisions on the stock market Businesspeople rely on good communication to conduct business Markets reflect the thoughts and feelings of buyers and sellers

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.

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

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?

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

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

Deficiency payments Check sent to producers that makes up the difference between the actual market price and the target price Prevented the gov’t from holding surplus foods Had farmers sell crops on the open market

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

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

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 Why might a government interfere in a market economy by setting prices? To achieve the goals of equity and security To insure an entrepreneur’s profit To distort market outcomes To allow the price system to transmit accurate information What is meant by the phrase “markets talk?” Market changes are written about in newspapers and magazines Government officials base decisions on the stock market Businesspeople rely on good communication to conduct business Markets reflect the thoughts and feelings of buyers and sellers