1. Social Goals vs. Market Efficiency

2. 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

3. 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.

4. 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

5. 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?

6. 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

7. 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

8. 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

9. 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

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

11. 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