Notebook # 16 -Economics 6-3

Social goals vs. market efficiency

Economics 6-3Social Goals vs. market

efficiency

ESSENTIAL QUESTION:

How does having a fixed price rather than the equilibrium price affect the market?

Economics 6-3Social goals vs. market efficiency

GPS STANDARD: SSEMI3 b.)- explain and illustrate…how price floors create surpluses and price ceilings create shortages

Economics 6-3Social goals vs. market efficiency

• To achieve one or more of its social goals, government sometimes sets prices.

•Chances are that you have worked for the minimum wage at some time in your life. Why is this an example of a price floor?

•Because the government is setting the lowest price that a person can be paid for their labor (work)

Economics 6-3Social goals vs. market efficiency

• In Chapter 2, we examined seven broad economic and social goals that most people seem to share.

•We also observed that these goals, while commendable, were sometimes in conflict with one another.

Economics 6-3Social goals vs. market efficiency

• These goals were also partially responsible for the increased role that government plays in our economy.

•The goals most compatible with a market economy are freedom, efficiency, full employment, price stability, and economic growth.

Economics 6-3Social goals vs. market efficiency

• Attempts to achieve the other two goals—equity and security—usually require policies that distort market outcomes.

•In other words, we may have to give up a little efficiency and freedom in order to achieve equity and security.

•Whether this is good or bad often depends on a person’s perspective.

Economics 6-3Social goals vs. market efficiency

• After all, the person who receives a subsidy (Medicare, social security, healthcare, welfare, etc.)- • …..Is more likely to support it than is the taxpayer who pays for it.

•What is common to all of these situations, however, is that the outcomes can be achieved only at the cost of interfering with the market.

Did You Know?• During the nation’s Great Depression, prices for farm products tumbled.

•Farmers lost much money, and many even lost their farms.

•At the same time, the farms produced surplus crops.

•To combat this, in 1933, the government passed the Agricultural Adjustment Act. •In part, this act authorized payments to farmers who agreed to reduce the acreage they farmed.

•This effectively reduced the crop surplus and boosted farmer income.

Social goals vs. market efficiency• In housing markets, a rent control is a price ceiling (the highest rent that the government will allow for that house or apartment.)Figure 6.5aFigure 6.5a

Social goals vs. market efficiency

• The minimum wage is an example of a price floor (because the government is setting the lowest price that a person can be paid for their labor).

Figure 6.5bFigure 6.5b