ECONOMICS U$A
ECONOMIC EFFICIENCY
To help viewers understand the forces that affect prices, the way prices act as signals to consumers and producers, the cost of interfering with free-market prices, and the circumstances that justify interference with the free-market.
OJBECTIVES:
1. People are motivated to buy and sell goods and labor services by their desire to improve their well-being.
a) Consumers purchase products and services to maximize their well-being.
b) Producers supply these products and services in a manner that maximizes their profits.
2. Prices are the mechanism that provides information and incentives to buyers and sellers
a) Prices tell producers how much they can produce at what profit.
b) Prices indicate to consumers how much and what they can buy with their income.
c) The market balance occurs at a price where the separately formed plans to buyers and sellers mesh so that the quantity demanded (at a particular price) and the quantity supplied (at that price) are the same.
d) This equilibrium point encourages the efficient allocation of resources.
3. Interference with the natural market forces through the imposition of price controls, rationing, quotas, etc., can lead to an inefficient allocation of resources.
4. There are circumstances in which market intervention may be justifiable.
a) Markets may exhibit unstable price behavior.
b) Market forces may hurt the economically disadvantaged.
c) Markets may not respond quickly enough during national emergencies.
KEY ECONOMIC CONCEPTS:
economic efficiency, equilibrium, allocation of resources, supply curve, price controls, demand curve, rent controls competitive price system, productive resources, invisible hand
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Contemporary Issues Economic Efficiency Some communities still have rent control programs. These programs are usually justified on the grounds of protecting poor and elderly renters from steep rises in rents, especially during real estate booms when both residential prices and rents tend to rise very rapidly. However, landlords often react to such a situation by allowing rent-controlled properties to deteriorate and by not investing in new rental units that would fall under a rent control program. In circumstances like this, real estate tax collections by the government can also be adversely affected. Are there other ways in which governments can help low income renters without incurring the high costs associated with rent controls. |
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| Nixon’s Price Controls Inflation became the basic national concern during the administration of Richard Nixon. He ordered a freeze on all prices and wages throughout the United States for a period of 90 days and ordered the Cost of Living Council to impose a ceiling on prices of beef, pork and lamb. The price control gamble was based on the idea that all of the underlying price factors would hold still. But, in fact, experience shows the odds almost always favor change. Huge wheat shipments were going overseas because of the surpluses until a drought in the southwest destroyed much of the winter wheat crop. Cattlemen soon saw their feed prices, which were not controlled, push higher, while their beef prices remained locked in a vice. Because farmers are an independent group of businessmen one of the first things that they tried to do was to withhold their animals from markets. That had the effect of tightening up on supplies and actually putting real pressure on the whole system. By the middle of the summer, beef was scarce in many areas of the country…and now it was consumers who were trapped. The price controls they had demanded had led not only to lower prices…but to lower levels of meat production and prices for beef shot up. Once the controls were relaxed, however, the animals came to market the price fell down driving many producers out of the business. Consumers felt the shortages for several years. Comment and Analysis by Richard Gill People will generally tend to act in their own best self interest. They try to maximize their satisfactions or welfare. Consumers might like to have all the goods they possibly could, but are limited in their budgets and must choose. In making a choice, they try to maximize their own welfare. The same is true of producers. In their case they try to maximize their firm’s profits. And they can maximize their profits…if they use more efficient productive methods and produce those goods that consumers will, in fact buy |
| WWII Price Controls The attack on Pearl Harbor was a surprise, but planning for World War II had been underway for some time. As German armies swept across Europe, America began to build up its military and to prepare its economy for the shock of war. Many adult Americans still held vivid memories of the hardships caused by inflation during the unregulated economy of World War I. The cost of living then spiraled up more than 100%. Every worker and every resource was suddenly in precious demand. Military and civilian needs competed with no referee but the price system…and so prices naturally shot higher. As another and potentially greater war approached American shores, President Roosevelt prepared to initiate price controls. But the job of planning and controlling the economy was anything but easy. Scarce resources were rationed…silk, for example, was no longer available for stockings…So resourceful women found substitutes. President Roosevelt’s advisors assured him that business had to make money out of the process of aiding the war effort…or business wouldn’t produce…So the government ultimately determined the prices paid for war materials, with an emphasis on attractive profit incentives for producers. The Office of Price Administration not only had to set prices…it had to see that the men and women on the home front would go along with the regulated market. OPA wasted few opportunities to publicize the value of price controls… and for the duration of the war, it continued to provide patriotic guidance for the American public. Most Americans agreed that these shortages and inconveniences were trivial compared with the national crusade to win the war. And so they cooperated with the emergency programs. They invested in war bonds and saved their money for the goods that would be available when the fighting was over. For the duration, the controlled market carried out its necessary functions…and defense goals were met. Comment and Analysis by Richard Gill |
| New York Housing Crisis The end of World War II brought a major question: Where were all these returning vets going to live? New York had a housing crisis…The returning veterans and their families badly needed an additional 200,000 housing units. Because of the shortage, big price hikes were expected. So, when the federal government removed wartime rent controls…the State of New York continued them on all existing rental housing. The goal was patriotic and understandable…to give the vets a helping hand, and it seemed to be working, after a fashion. There was a need for rent control because of the unusual shortage of housing. And, of course it also was true that there was a great deal of pressure from renters, from tenants, and obviously there are an overwhelming majority of tenants in the city as contrasted to landlords. The fabric of neighborhoods and housing seemed unaffected by rent control at first. Brick and mortar do not immediately waste away and maintenance costs were stable throughout the 1950s. But the cost could not hold still forever…inevitably the system began to crack under the stress. First, landlords skimped on some repairs. Before too long, they were locked into making ends meet with deteriorating buildings. Then, balance sheets showed that costs were so high and returns so low they could no longer afford to keep their buildings. In the 1960s, first a few, then hundreds of landlords began to abandon their buildings. At the same time, private housing construction in the city came to a standstill. Rent ceilings cut into profit margins…Profits or people?...The issue was an emotional one with no neutral bystanders. But while the debate raged, investors took their money elsewhere, Comment and Analysis by Richard Gill Rent control can be summarized by the curves of supply and demand. Rent controls bring into being lower prices. The quantity demanded now exceeds the quantity supplied and there’s a housing shortage. Apartments are sought and not to be found. This is an economically inefficient situation, but it may not be the only economic objective. The objective may be to improve income distribution. Also the market place itself is not always perfectly efficient so no conclusion can be reached that any and all interferences with the price system are necessarily harmful. But almost always, such interferences do have some costs in terms of economic efficiency. |