Social Goals vs. Market Efficiency•As a market, we share seven economic and social goals. Sometimes these goals are in conflict with each other.

•Goals such as equity and security are achieved by sacrificing efficiency and interfering with the market.

Distorting Market Outcomes•Achieving equity and security (two of the seven broad economic and social goals) usually requires policies that distort market outcomes. •One way to achieve these goals is to set “socially desirable” prices, which interferes with the pricing system. In this case, prices are not allowed to adjust to their equilibrium levels.

Ex: Price Ceiling & Price Floors

Distorting Market Outcomes•Price Ceilings – maximum legal price that can be charges for a product. A Price Ceiling has an impact on buyers and sellers. Price Ceiling also affects the allocation of resources.

Ex: Rent Control•Price Floors – Prices are considered too low and steps are taken to keep them higher.

Ex: Minimum Wage

•A Price Ceiling is a legal maximum that can be charged for a good. The result is a shortage. •There is a tradeoff between efficiency and equity. •Examples include: rent control and credit card interest rates.

•A Price Floor is a legal minimum that can be charged for a good. The result is a surplus. •There is a tradeoff between efficiency and equity. •Examples include: minimum wage and agricultural markets such as sugar, wheat, and milk.

Agricultural Price Supports•Government loan support was offered in the 1930s through the Commodity Credit Corporation (CCC) to help stabilize agricultural prices. This program took two forms and made use of a Target Price (Price Floor):1. Loan Supports (nonrecourse loan) - loans

that carries no penalty and no obligation to repay. Money would be used to help farmers and their crops or proceeds would serve as payment. This led to food surpluses.

Agricultural Price Supports2. Deficiency Payments – Farmers would sell

their products on the open market and the CCC would Make up the difference between the actual market price and the Target Price. In this case, the government was not left with the surplus and the CCC could limit production.

Agricultural Price Supports• Federal Agricultural Improvement and

Reform Act (FAIR) – Cash payments replaced price supports and deficiency payments. This proved to be just as costly as price supports and deficiency payments. As of 2002, farmers no longer receive payments as they should have been able to adjust to the laws of supply and demand.

• Food, Conservation, and Energy Act – 2008• 2013 – Farmers very reliant on subsidies and

loan supports.

When Markets Talk• Markets “talk” when prices move up or

down dramatically.• Buyers and sellers respond to changes in

the market through their decisions.