5.3 An Introduction to Market

Productive Efficiency

In this chapter we have seen the effects of governments intervening in
competitive markets by setting price floors and price ceilings. In both
cases, we noted that the imposition of a controlled price generates
benefits for some individuals and costs for others. For example, in the
case of the legislated minimum wage (a price floor), firms are made worse
off by the minimum wage, but workers who retain their jobs are made
better off. Other workers, those unable to retain their jobs at the higher
wage, are made worse off. In the example of legislated rent controls (a
price ceiling), landlords are made worse off by the rent controls, but some
tenants are made better off. Those tenants who are no longer able to find
an apartment when rents fall are made worse off.

Is it possible to determine the overall effects of such policies, rather than
just the effects on specific groups? For example, can we say that a policy
of legislated minimum wages, while harming firms, nonetheless makes
society as a whole better off because it helps workers more than it harms
firms? Or can we conclude that the imposition of rent controls makes
society as a whole better off because it helps tenants more than it harms
landlords?