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- [man] So far, we've looked at

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a number of the consequences 
of price controls,

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both price ceilings 
and price floors.

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And most of the consequences, 
they're not very good.

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Why do governments 
enact price controls?

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We won't be able to cover 
all of the reasons here,

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but let's cover a few
of the big ones.

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Do you remember how we began 
this series of lectures?

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With President Richard Nixon, 
imposing wage and price controls

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throughout the US economy 
in August of 1971.

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Now again, this was one of the
largest peacetime interventions

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into the economy ever.

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It was a massive policy with

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many, many severe 
and serious consequences,

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but I haven't yet told
you the rest of the story.

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Here's the rest of the story.

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In November of 1972,

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Nixon won re-election
in a landslide.

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So, wage and price controls 
were popular.

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Nixon was re-elected with 
this policy as well as with others.

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Now, why is this?

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I think in many cases, 
in a majority of cases,

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the public simply did not connect 
wage and price controls

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with their consequences.

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So, looking around 
and the shortages,

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the long line-ups for gasoline,

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they didn't say the cause of that
is the price control.

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What did they think the cause was?

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Well, if you look at surveys 
from that time,

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what was the cause of shortages?

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Well, people would say it's OPEC, 
it's the Arabs, it's the foreigners,

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it's the greedy oil companies.

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They're the ones 
causing the shortage.

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In fact, we know that although 
these might be good explanations

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in some sense for high prices,

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they're certainly not good 
explanations for a shortage.

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In a free market, we would never 
see a shortage.

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The cause of the shortage 
was the price control,

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but the public didn't see that.

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The public did not have the benefit 
of the great economics education

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which you're receiving today.

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Moreover, this was not just true 
for the American public,

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but for people around the world.

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Let's take another example.

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Here's another example 
of price control on oil.

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In 2003, Iraq fixed 
the price of gasoline

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in the country 
at five cents per gallon.

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Great, great, cheap gasoline, right?

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Well no, of course, there were 
shortages and long lines,

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just as in the United States 
during the 1970s.

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Indeed, this picture looks like 


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it might be from 
the United States in the 1970s,

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except perhaps, for this guy back here.

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In fact, it is a picture from Iraq.

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Now, whom did the Iraqis blame? 


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Did they blame the price control? 
No.

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In fact, just like the Americans 
in the 1970s,

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they blamed foreigners; 


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except, this time they blamed 
the Americans.

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They said, well the Americans 
are shipping all of the oil out.

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Of course, the real cause of 
the shortage was the price control

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at five cents per gallon 
of gasoline.

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Now, one might agree with 
everything we've said here so far

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but still have the feeling

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that maybe price controls
help the poor,

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and for some of the poor 
this is probably true.

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Rent controls, for example,

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they help people who have 
rent-controlled apartments,

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but they make it more difficult 
to get an apartment.

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There's a real trade-off there.

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Moreover, many people 
with rent-controlled apartments

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are not poor.

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There are lots of rich people 
in New York City

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who have rent-controlled apartments

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and who won't give them up

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because they're a great deal.

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So rent control is not 
a very targeted approach

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to helping the poor.

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Same kind of thing is true 
about minimum wages.

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Minimum wages help workers 
who keep their jobs

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at the higher wage,


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but they don't help those 
who can't find a job

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and who are made
unemployed by their higher wage.

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Again, there's a trade-off.

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Perhaps, even taking into account 
the trade-off,

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workers would still like minimum wages

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but not everybody is benefited.

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Moreover, many people

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with minimum wage jobs 
are not truly poor.

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For example, students 
and young people

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often living at home, often with 
part-time jobs and so forth.

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This is not to say that

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we don't care about 
students and young people.

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It's simply to say that 


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the minimum wage 
is not very targeted.

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It doesn't target the poor.

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It targets people who have 
minimum-wage jobs,

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and not all of them are poor 
by any means whatsoever.

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Some of them are just young 
and starting out in the job force.

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Moreover, the response here 
to minimum wages and rent controls

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is not necessarily that 
we shouldn't do anything,

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but rather that there may be 
better ways to help the poor.

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Housing vouchers, for example,
are targeted to poor people

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and allow them to pay more for
their rent.

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They allow them to buy 
any apartments any place

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and so forth,

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but they add to the purchasing power
of poor people for their rent.

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We've a large housing 
voucher program

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in the United States, 
and it's been very successful.

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Similarly, wage subsidies are maybe 
a better approach

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to helping the poor than 
is the minimum wage.

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We looked at this once before.

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Let's very briefly take another 
look at wage subsidies

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versus the minimum wage.

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Remember how we analyzed 
the wage subsidy

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by putting the subsidy wage
into the diagram

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and finding that the wage subsidy 
increases the wage received

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by workers at the same time as 
it reduces the wage paid by firms.

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The difference being
made up by the subsidy.

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One of the things about the wage subsidy,

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of course, it costs the tax payers 
when a minimum wage does not.

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But notice that the wage subsidy 
increases employment to QS.

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On the other hand, a minimum wage 
at the same wage of $12

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as happens with the wage subsidy,

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well that actually
reduces employment to QD.

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So there may be better ways

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of helping the poor 
than price controls.

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Economists believe not that 
we shouldn't help the poor,

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but rather that we should try 
and do it in a way

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which is consistent with markets,
that works alongside markets,

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rather than trying 
to override markets,

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which often leads to unintended 
and negative consequences.

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If you want to test yourself 
click "Practice Questions"

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or if you're ready to
move on just click "Next Video."

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♪ [music] ♪