Market Efficiency and Market Failure
•Price ceiling A legally
determined maximum price
that sellers may charge.
•Price floor A legally
determined minimum price
that sellers may receive.
Learning Objective 4.1
Consumer Surplus and Producer Surplus4.1
• Consumer Surplus
Consumer surplus
The difference between the
highest price a consumer is
willing to pay and the price the
consumer actually pays.
Marginal benefit
The additional benefit to a
consumer from consuming one
more unit of a good or service.
Learning Objective 4.1
Making •The Consumer Surplus from
the Satellite Television
Connection
Consumer surplus allows us to measure the benefit consumers
receive in excess of the price they paid to purchase a product.
Learning Objective 4.1
Consumer Surplus and Producer
Surplus
• Producer Surplus
Marginal cost The additional
cost to a firm of producing one
more unit of a good or service.
Producer surplus The difference
between the lowest price a firm
would have been willing to accept
and the price it actually receives.
Learning Objective 4.1
Consumer Surplus and Producer
Surplus
• Producer Surplus
FIGURE 4-4
Calculating Producer Surplus
Learning Objective 4.1
Consumer Surplus and Producer
Surplus
• What Consumer Surplus and Producer Surplus Measure
Consumer surplus measures the net benefit to consumers from
participating in a market rather than the total benefit. The net
benefit equals the total benefit received by consumers minus the
total amount they must pay to buy the good.
Similarly, producer surplus measures the net benefit received by
producers from participating in a market, or the total amount firms
receive from consumers minus the cost of producing the good.
Learning Objective 4.2
The Efficiency of Competitive
Markets
Marginal Benefit Equals Marginal Cost in Competitive
Equilibrium
FIGURE 4-5
Marginal Benefit Equals Marginal Cost
Only at Competitive Equilibrium
Learning Objective 4.2
The Efficiency of Competitive Markets
Economic Surplus
Economic surplus The sum of
consumer surplus and producer surplus.
FIGURE 4-6
Economic Surplus
Equals the Sum of
Consumer Surplus
and Producer Surplus
Learning Objective 4.2
The Efficiency of Competitive Markets
Deadweight Loss
FIGURE 4-7
When a Market Is Not in
Equilibrium There is a
Deadweight Loss
Deadweight loss The reduction in economic surplus
resulting from a market not being in competitive equilibrium.
Learning Objective 4.2
The Efficiency of Competitive Markets
Economic Surplus and Economic Efficiency
Economic efficiency
A market outcome in which the
marginal benefit to consumers of
the last unit produced is equal to
its marginal cost of production,
and in which the sum of
consumer surplus and producer
surplus is at a maximum.
Price Ceilings
• A price ceiling is a government-imposed limit on how high a price can
be charged on a product. For a price ceiling to be effective, it must
differ from the free market price
• Example:
• New York City rent control
• Landlords are not allowed to raise rental prices
• Gerald Ford’s Whip Inflation Now (WIN)
• World War II
• Somewhat effective (resulted in blackmarkets, rationing)
• Impact:
• Shortages and higher costs
Learning Objective 4.3
Making •Price Floors in Labor Markets: The
the Debate Over Minimum Wage Policy
Connection
Learning Objective 4.3
Government Intervention in the Market:
Price Floors
And
Price
Ceilings
Price Ceilings: Government Rent Control Policy in
Housing Markets
FIGURE 4-9
The Economic Effect of
a Rent Ceiling
Don’t Let This Happen to YOU!
Don’t Confuse “Scarcity” with a “Shortage”
An Economist’s Perspective
• Cato Institute
• http://www.cato.org/pubs/tbb/tbb_0707_47.pdf
• The federal government has subsidized and regulated the dairy industry since the
1930s. A system of “marketing order” regulations was enacted in 1937. A dairy
price support program was added in 1949. An income support program for dairy
farmers was added in 2002.
• As part of this year’s farm bill, Congress may reauthorize dairy programs, but they
are among the most illogical of all farm programs.1 The government spends
billions of dollars reducing food costs through programs such as food stamps, yet
dairy programs increase milk prices.
Learning Objective 4.3
Government Intervention in the Market:
Price Floors
And
Price
Floor
Price Floors: Government Policy in Agricultural Markets
FIGURE 4-8
The Economic Effect
of a Price Floor in the
Wheat Market
Learning Objective 4.3
Government Intervention in the Market:
Price Floors
And
Price
Ceilings
Black Markets
Black markets A market in
which buying and selling take
place at prices that violate
government price regulations.
Learning Objective 4.3
Government Intervention in the Market:
Price Floors
And
Price
Ceilings
The Results of Government Price Controls: Winners, Losers,
and Inefficiency
•When the government imposes price floors or
price ceilings, three important results occur:
• Some people win.
• Some people lose.
• There is a loss of economic efficiency.
Learning Objective 4.3
Government Intervention in the Market:
Price Floors
And
Price
Ceilings
Positive and Normative Analysis of Price Ceilings
and Price Floors
•Whether rent controls or federal farm programs
are desirable or undesirable is a normative
question.
•Whether the gains to the winners more than
make up for the losses to the losers and for the
decline in economic efficiency is a matter of
judgment and not strictly an economic question.