Social Goals vs Market Efficiency

Study Ciii^

Main Idea

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

Reading Strategy

Graphic Organizer As you read the section, complete a cause-and-effect chart similar to the one below by explaining how price ceilings affect quantity supplied.

Effect on quantity^ supplied

Key Terms price ceiling, minimum wage, price floor, target price, nonrecourse loan, deficiency payment


After studying this section, you will be able to:

1. Describe the consequence of having a fixed price in a market.

2. Explain how loan supports and deficiency payments work.

3. Understand what is meant when "markets talk."

Applying Economic Concepts

Price Floor Chances are that you have worked for the minimum wage at some time in your life. Read to see why this is an example of a price floor.


Various farmer aid proposals considered

Congress Sews a Safety Net for Farmers

Three years after a major farm bill ended the nation's decades-old program of agricultural price supports Congress is considering beef-,-•> ing up safety nets to aid farm ers around the country hit by dramatically low crop n ices shrinking exports, and falling mcomes. PUBe:t the proposed solutrons-ra^ng from n expanded crop—, P^^J Ud rSS^ffi ^ and approved for farmers last October. . . .

-The Christian Science Monitor March 12, 1999

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. 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. Attempts to achieve the other two goals—equity and security—usually require policies like the "safety net for farmers" in the cover story 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. After all, the person who receives a subsidy is more likely to support it than is the taxpayer who pays for it. In general, however, it is usually wise to evaluate each situation on its own merits, as the benefits of a program may well exceed the costs. 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.




Figure 6.5

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