The use of price ceilings and price floors to undo pure market outcomes is cer- tainly not an invention of the modern world. In fact, ever since marketsfirst came into being, societies have been busy tailoring market prices to conform more closely to their social, political, and religious values.
In ancient economies, for example, the market price of borrowing money—the interest rate—was capped by a price ceiling. Usury laws, fixing the maximum price of borrowing money, are at least as old as biblical literature. Such laws are also found in the Islamic Koran and in the descriptions of the ideal society envisaged by Greek and Roman philosophers, for much the same reasons. Interest taking, particularly at market rates, was universally regarded as exploitative, socially dis- ruptive, and morally corrupting.
That view, along with usury laws, survives today. State governments have the constitutional right to enact usury laws and many still do in a variety of consumer lending markets.
Some moneylenders, whose only crime in life is charging what the market allows—just as butchers, bakers, and candlestick makers do—are nonetheless still singled out and regarded as unsavory, exploitative loan sharks. Their neg- ative image collides with our belief in the virtues of the market system and serves to accent the sometimes contradictory sets of social and economic values we hold.
Although price ceilings and price floors have always played an important role in our economy, they have always represented exceptions to the rule. In most markets, market-determined prices prevail. They do so because we allow them to. Only unusual circumstances prompt their abandonment. A national security crisis or dramatic changes in the fortunes of critical industries in our economy have, at times, allowed noneconomic considerations to dominate over pure market outcomes.
CHAPTER REVIEW
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1. Sometimes, market-determined prices are driven considerably beyond their historical levels, and society decides to control the price rather than to accept the market outcome. A national security crisis is an example of an event creating such a situation.
2. Establishment of a price ceiling below the equi- librium market price results in excess demand. An economy might cope with chronic excess demand through a rationing system.
3. Price ceilings and ration coupons were used extensively in the U.S. economy during World War II to mobilize resources for war production.
Resources had to be shifted from civilian produc- tion, which resulted in decreased supply in civilian markets and would have caused skyrocketing prices had not price ceilings been imposed.
4. Pricefloors may be implemented when society decides that a price has fallen too low relative to its historical levels. Setting a pricefloor above the
Usury
Originally, the charging of interest on loans, but it has come to mean the charg- ing of unreasonably high rates of interest. Usury laws have been enacted tofix the maximum price of bor- rowing money since ancient times.
equilibrium price results in chronic excess supply.
Disposing of the excess supply presents a new problem for society.
5. Because agriculture is such a significant industry in the United States, the decision was made in the early 1930s to intervene in farm markets. The Agricultural Adjustment Act of 1933 set parity prices for farmers’ products. Parity pricing was intended to restore parity—equality—between farm and nonfarm prices.
6. Between 1933 and 2008, farmers relied on a sub- sidy tool kit—consisting of variations on the parity pricing theme—to safeguard them against the perils of a free and unfettered farm market.
The essential idea was maintenance of a price floor.
7. The Freedom to Farm Act of 1996 was designed to bring market-derived prices back into the agri- cultural economy. It never happened.
8. The Farm Bill of 2008 not only kept farm subsidies in place but raised the subsidy per farm limit from
$250,000 to $750,000, reflecting the power corpo- rate agribusiness exercises in Congress.
9. Another example of a price ceiling is usury laws, which have been imposed worldwide since ancient times.
KEY TERMS
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Price ceiling Ration coupon Rent control Pricefloor
Parity price ratio Freedom to Farm Act
of 1996 Farm Bill of 2008
Usury
QUESTIONS
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1. Low income families want community colleges to impose a tuition price ceiling. This way,
more people get a college education. Do you agree? What economic analysis can you offer to make your case?
2. When the rains ended, most of the season’s crops were destroyed. A government economic adviser suggests imposing a price ceiling on food. Her husband thinks a pricefloor is better. Who’s right?
Why?
3. The reason farmers have not done as well as the nonfarm population is because:
a.The government has interfered in the agricul- tural market.
b.The character of demand and supply in the farm goods market works against the farmer;
government interference is not the problem.
Discuss the merit or lack of merit in each argument.
4. Paradoxically, farmers’ remarkable success as producers undermines their ability to achieve financial success. Discuss.
5. If the government decides not to interfere in the farm economy, who gains? Who loses?
6. What is parity pricing? How does it work? What is the rationale for using such a mechanism in the agricultural market?
7. How do you view minimum wage laws? (A wage is the“price” of labor.) Do minimum wages rep- resent pricefloors or price ceilings? Can you make a case for them? A case against them?
8. What are usury laws? Why do you think they have been so universally applied?
9. If a price ceiling were imposed in afish market whose equilibrium price was substantially above the ceiling, what effect would the price ceiling on fish have on the demand for meat and fowl?
10. Why are ration coupons typically coupled with price ceilings?
11. How does the Farm Act of 2008 differ from the Freedom to Farm Act of 1996?
152 PART 2 Find more at http://www.downloadslide.comINTRODUCTION TO MICROECONOMICS
PRACTICE PROBLEMS
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1. Given the demand and supply schedules shown in the following table, what would happen to (a) the price students pay for school lunches, (b) quantity of school lunches demanded, and (c) quantity of school lunches supplied if (a) the government imposed a $2 price ceiling or (b) a $1 pricefloor on school lunches.
QUANTITY QUANTITY
PRICE DEMANDED SUPPLIED
$5 250 650
4 350 550
3 450 450
2 550 350
1 650 250
2. Determine the parity price ratio for the following years and comment on how it would most likely affect the volume of the Commodity Credit Corporation’s loans.
PRICES RECEIVED PRICES PAID YEAR BY FARMERS BY FARMERS 1990 100 100 1991 105 125 1992 110 160 1993 115 190
3. Graph the parity ratio for 1990 to 1993.
4. Google“Farm Subsidy Database” and (a) list the leading 15 farm goods subsidized, (b) the number of recipients in each, and (c) the total value of subsidies given in each since 1995.
5. Using the same database, select your state and (a) record its ranking among the 50 states and (b) the percent of total subsidies awarded to the top 10 percent of those subsidized.
E c o n o m i c C o n s u l t a n t s
Economic Research and Analysis by Students for Professionals
A group of Illinois farmers has formed Farmer’s Cooperative to market and sell its crops. These farmers primarily produce grain. While these farmers understand how to grow and harvest crops, they are unfamiliar with the economics of the agriculture industry.
Farmer’s Cooperative has approached Economic Consultants to offer advice on how to make its venture successful. Pre- pare a report for Farmer’s Cooperative that addresses the following issues:
1. What are the conditions of the market for grain? What organizations are available to assist Farmer’s Cooperative?
2. What types of government policies affect these farmers?
3. What does Farmer’s Cooper- ative need to understand about farm subsidies?
You mayfind the following resources helpful as you prepare this report for Farmer’s:
l U.S. Department of Agriculture (USDA) (http://www.usda. gov/)—
the USDA provides data and information about U.S. agriculture.
l American Farm Bureau (http://www.fb.org/)—The American Farm Bureau Feder- ation is the nation’s largest general farm organization.
l Progressive Farmer(http://
www.ProgressiveFarmer.
com)—Progressive Farmeris a journal about agriculture and rural living.
l Agri-America NetCenter (http://www.educationindex.
com/ag/)—Agri-America pro- vides links to national, state, and local agricultural resources.
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practice test
1. Why would the government impose a price ceil- ing in the sugar market? Because
a. the market price of sugar is above the equi- librium price.
b. the market price of sugar is below the equi- librium price.
c. it considers the market price to be too high.
d. it considers the market price to be too low.
e. excess demand for sugar at the market price creates shortages.
2. The need for pricefloors in the markets for farm goods arose in part due to
a. pressure from consumer groups that were angry over paying high prices.
b. inefficiencies in markets for farm goods.
c. persisting rightward shifts in the market sup- ply curves for farm goods, due to technological improvements in agriculture.
d. excessive government regulation.
e. persisting rightward shifts in the market demand curves for farm goods, due to higher incomes of consumers.
3. Some economists have criticized rent control programs because they
a. are applied in situations where there is already an excess supply of housing.
b. lead to a higher quantity of housing on the market than would exist otherwise.
c. increase the price of rental housing.
d. increase landlords’ profits.
e. reduce the incentive for landlords to maintain and expand rental housing.
4. Ration coupons issued by the government during World War II were intended to
a. subsidize producers affected by pricefloors.
b. subsidize producers affected by price ceilings.
c. deal with the problem of excess demand created by price ceilings.
d. deal with the problem of excess demand created by price floors.
e. deal with the problem of excess supply created by price ceilings.
5. When a price ceiling is imposed on a market (assuming the price ceiling is below the equili- brium price),
a. the quantity of the good supplied will fall.
b. the quantity of the good supplied will rise.
c. the demand curve for the good will shift to the left.
d. the demand curve for the good will shift to the right.
e. decisions must be made concerning the sale of excess supply.
6. Pricefloors are usually designed to help ______, while price ceilings are intended to help ______.
a. producers/consumers.
b. consumers/producers.
c. the relatively poor/the relatively rich.
d. those burdened with excess demand/those burdened with excess supply.
e. those burdened with excess supply/those burdened with excess demand.
7. Parity pricing
a. leads to an excess demand for a good.
b. is another name for equilibrium pricing.
c. is a means of subsidizing producers.
d. provides incentives for producers to adopt new technologies.
e. leads to a rightward shift in the demand curve.
8. One criticism of the parity pricing system is that it
a. promotes higher market prices.
b. provides incentives for producers to increase the quantity they supply, thus reducing market prices.
c. leads to a leftward shift in the market supply curve.
d. leads to a leftward shift in the market demand curve.
e. pays producers for not producing goods.
9. Compare the Farm Act of 2008 to the Freedom to Farm Act of 1996. The major difference was that the 2008 Act:
a. cut the level of farm subsidies to less than half the subsidies legislated in the 1996 Act.
b. made government intervention the norm once again, unlike the policy underlying the 1996 Act which was to promote free market outcomes.
c. focused on farm incomes while the 1996 Act focused on global issues associated with the farming industry.
d. lowered the limit of subsidy paid per sub- sidized farmer.
e. disallowed subsidies to be paid to illegal immigrant farmers.
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10. When the government sets a price ceiling below the equilibrium price in the market for gasoline
a. an excess supply of gasoline emerges in the market.
b. the equilibrium price of gasoline will fall to the price ceiling level.
c. not everyone who is willing and able to con- sume gasoline at the ceiling price will be able to do so.
d. the supply curve for gasoline will shift to the right.
e. the demand curve for gasoline will shift to the right.