Social Goals vs. Market Efficiency

Jump Start Chapter 6 section 31. Which of the following is an example of a price ceiling?

A. Minimum wage B. “free lunch” programC. Rent control D. Government subsidies

2. Price ceilings that are artificially low are likely to create A. A price floor B. A surplus C. An equilibrium D. A shortage

3. Price floors that are artificially high are likely to create A. A price ceiling B. A surplusC. An equilibrium D. A shortage

4. Why might a government interfere in a market economy by setting prices?A. To achieve the goals of equity and security B. To insure an entrepreneur’s profit C. To distort market outcomes D. To allow the price system to transmit accurate information

5. What is meant by the phrase “markets talk?” A. Market changes are written about in newspapers and magazines B. Government officials base decisions on the stock market C. Businesspeople rely on good communication to conduct business D. 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

Figure 6.5aFigure 6.5a

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?

Figure 6.5bFigure 6.5b

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

Figure 6.6aFigure 6.6a

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

Figure 6.6bFigure 6.6b

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 31. Which of the following is an example of a price ceiling?

A. Minimum wage B. “free lunch” programC. Rent control D. Government subsidies

2. Price ceilings that are artificially low are likely to create A. A price floor B. A surplus C. An equilibrium D. A shortage

3. Price floors that are artificially high are likely to create A. A price ceiling B. A surplusC. An equilibrium D. A shortage

4. Why might a government interfere in a market economy by setting prices?A. To achieve the goals of equity and security B. To insure an entrepreneur’s profit C. To distort market outcomes D. To allow the price system to transmit accurate information

5. What is meant by the phrase “markets talk?” A. Market changes are written about in newspapers and magazines B. Government officials base decisions on the stock market C. Businesspeople rely on good communication to conduct business D. Markets reflect the thoughts and feelings of buyers and sellers