[Script Info]
Title: 
[Events]
Format: Layer, Start, End, Style, Name, MarginL, MarginR, MarginV, Effect, Text
Dialogue: 0,0:00:02.03,0:00:04.03,Default,,0000,0000,0000,,♪ [music] ♪
Dialogue: 0,0:00:08.84,0:00:11.07,Default,,0000,0000,0000,,- [Alex] In the next several videos, \Nwe'll dive deeper
Dialogue: 0,0:00:11.07,0:00:14.20,Default,,0000,0000,0000,,into price ceilings \Nand also price floors.
Dialogue: 0,0:00:14.20,0:00:16.56,Default,,0000,0000,0000,,These are important \Nfor two reasons.
Dialogue: 0,0:00:16.56,0:00:19.48,Default,,0000,0000,0000,,First, governments around \Nthe world, both today
Dialogue: 0,0:00:19.48,0:00:23.19,Default,,0000,0000,0000,,and historically, often do impose \Nprice ceilings and floors
Dialogue: 0,0:00:23.19,0:00:25.26,Default,,0000,0000,0000,,so we want to \Nunderstand their effects.
Dialogue: 0,0:00:25.80,0:00:30.07,Default,,0000,0000,0000,,Second, in the last section,\Nwe explained how a price is
Dialogue: 0,0:00:30.07,0:00:32.83,Default,,0000,0000,0000,,a signal wrapped up \Nin an incentive.
Dialogue: 0,0:00:33.26,0:00:36.31,Default,,0000,0000,0000,,In this section, we'll be\Nexplaining, well, what happens
Dialogue: 0,0:00:36.31,0:00:39.84,Default,,0000,0000,0000,,when that signal, that price, \Nis not allowed to do its work?
Dialogue: 0,0:00:40.31,0:00:42.41,Default,,0000,0000,0000,,When the price is not \Nallowed to rise or fall,
Dialogue: 0,0:00:42.41,0:00:44.94,Default,,0000,0000,0000,,what happens when \Nthat signal is not sent?
Dialogue: 0,0:00:45.21,0:00:47.97,Default,,0000,0000,0000,,What happens when that\Nincentive is taken away?
Dialogue: 0,0:00:52.72,0:00:56.41,Default,,0000,0000,0000,,A price ceiling is a maximum price \Nallowed by law.
Dialogue: 0,0:00:56.77,0:01:00.73,Default,,0000,0000,0000,,So for example, if the price\Nceiling on gasoline is $2.50, \N
Dialogue: 0,0:01:00.73,0:01:05.84,Default,,0000,0000,0000,,it is illegal to buy or sell \Ngasoline at above that price.
Dialogue: 0,0:01:06.24,0:01:08.43,Default,,0000,0000,0000,,It's called a ceiling\Nbecause you cannot go
Dialogue: 0,0:01:08.43,0:01:10.28,Default,,0000,0000,0000,,above the ceiling.
Dialogue: 0,0:01:10.53,0:01:12.68,Default,,0000,0000,0000,,So a ceiling is a maximum price.
Dialogue: 0,0:01:13.14,0:01:15.84,Default,,0000,0000,0000,,It has five important effects.
Dialogue: 0,0:01:15.84,0:01:20.63,Default,,0000,0000,0000,,It's going to create shortages, \Nreductions in product quality,
Dialogue: 0,0:01:20.63,0:01:24.38,Default,,0000,0000,0000,,wasteful lines\Nand other search costs,
Dialogue: 0,0:01:24.38,0:01:28.15,Default,,0000,0000,0000,,a loss in gains from trade --\Nor a deadweight loss --
Dialogue: 0,0:01:28.15,0:01:30.81,Default,,0000,0000,0000,,and a misallocation of resources.
Dialogue: 0,0:01:31.16,0:01:32.80,Default,,0000,0000,0000,,We're going to go through \Neach of these --
Dialogue: 0,0:01:32.80,0:01:34.46,Default,,0000,0000,0000,,let's begin with shortages.
Dialogue: 0,0:01:35.16,0:01:37.80,Default,,0000,0000,0000,,We can easily show \Nthat price ceilings create shortages
Dialogue: 0,0:01:37.82,0:01:40.30,Default,,0000,0000,0000,,using our standard \Ndemand and supply framework.
Dialogue: 0,0:01:40.62,0:01:42.91,Default,,0000,0000,0000,,We'll use the price of gasoline\Nas an example
Dialogue: 0,0:01:42.91,0:01:44.97,Default,,0000,0000,0000,,because governments often\Nhave imposed
Dialogue: 0,0:01:44.97,0:01:47.32,Default,,0000,0000,0000,,a maximum price on gasoline.
Dialogue: 0,0:01:47.68,0:01:51.35,Default,,0000,0000,0000,,Now, ordinarily, we would know \Nthat the market equilibrium
Dialogue: 0,0:01:51.35,0:01:53.46,Default,,0000,0000,0000,,would be found \Nwhere the quantity demanded
Dialogue: 0,0:01:53.46,0:01:55.65,Default,,0000,0000,0000,,is equal to the quantity supplied.
Dialogue: 0,0:01:55.65,0:01:59.17,Default,,0000,0000,0000,,But suppose that the government\Nimposes a maximum price
Dialogue: 0,0:01:59.17,0:02:01.43,Default,,0000,0000,0000,,which is below \Nthe market equilibrium.
Dialogue: 0,0:02:01.70,0:02:04.52,Default,,0000,0000,0000,,So, this is a controlled price, \Na maximum price
Dialogue: 0,0:02:04.52,0:02:08.21,Default,,0000,0000,0000,,above which it is illegal \Nto buy or sell this good.
Dialogue: 0,0:02:08.69,0:02:10.14,Default,,0000,0000,0000,,What we want to do now is
Dialogue: 0,0:02:10.14,0:02:13.72,Default,,0000,0000,0000,,simply read off the diagram \Nwhat happens.
Dialogue: 0,0:02:14.09,0:02:16.85,Default,,0000,0000,0000,,So at the controlled price, \Nwe can read
Dialogue: 0,0:02:16.85,0:02:21.38,Default,,0000,0000,0000,,that the quantity demanded\Ngiven by the demand curve, is here.
Dialogue: 0,0:02:21.77,0:02:24.49,Default,,0000,0000,0000,,At the controlled price,\Nthe quantity supplied is
Dialogue: 0,0:02:24.49,0:02:26.50,Default,,0000,0000,0000,,given by the supply curve \Nand is read here.
Dialogue: 0,0:02:26.83,0:02:30.40,Default,,0000,0000,0000,,Notice that at the controlled price, \Nthe quantity demanded
Dialogue: 0,0:02:30.45,0:02:34.07,Default,,0000,0000,0000,,exceeds the quantity supplied,\Nand that's the shortage.
Dialogue: 0,0:02:34.42,0:02:38.48,Default,,0000,0000,0000,,Now, ordinarily, if the quantity \Ndemanded exceeded
Dialogue: 0,0:02:38.48,0:02:41.16,Default,,0000,0000,0000,,the quantity supplied, \Nbuyers want more of this good
Dialogue: 0,0:02:41.16,0:02:44.38,Default,,0000,0000,0000,,than they're able\Nto get at the current price.
Dialogue: 0,0:02:44.74,0:02:49.07,Default,,0000,0000,0000,,Ordinarily, the buyers would \Ncompete to push the price up,
Dialogue: 0,0:02:49.07,0:02:51.82,Default,,0000,0000,0000,,and the price would increase \Nto the market price,
Dialogue: 0,0:02:51.82,0:02:53.81,Default,,0000,0000,0000,,and we would get \Nthe usual equilibrium.
Dialogue: 0,0:02:53.92,0:02:57.38,Default,,0000,0000,0000,,In this case, however, it's illegal \Nto push the price up.
Dialogue: 0,0:02:57.48,0:03:02.54,Default,,0000,0000,0000,,So as a result, the quantity demanded\Nexceeds the quantity supplied,
Dialogue: 0,0:03:02.54,0:03:05.24,Default,,0000,0000,0000,,and we get this shortage \Nwhich doesn't go away.
Dialogue: 0,0:03:05.85,0:03:08.29,Default,,0000,0000,0000,,The shortage is defined\Nsimply as the amount
Dialogue: 0,0:03:08.29,0:03:12.40,Default,,0000,0000,0000,,by which the quantity demanded \Nexceeds the quantity supplied
Dialogue: 0,0:03:12.40,0:03:14.37,Default,,0000,0000,0000,,at the controlled price.
Dialogue: 0,0:03:14.68,0:03:16.48,Default,,0000,0000,0000,,Let's give some examples.
Dialogue: 0,0:03:17.25,0:03:19.47,Default,,0000,0000,0000,,When goods are in shortage, \Nthat is when the quantity
Dialogue: 0,0:03:19.47,0:03:22.00,Default,,0000,0000,0000,,demanded exceeds \Nthe quantity supplied,
Dialogue: 0,0:03:22.00,0:03:24.84,Default,,0000,0000,0000,,sellers have more \Ncustomers than goods.
Dialogue: 0,0:03:25.28,0:03:28.55,Default,,0000,0000,0000,,Usually, sellers have \Nto compete to get customers,
Dialogue: 0,0:03:28.55,0:03:30.15,Default,,0000,0000,0000,,but when goods are in shortage,
Dialogue: 0,0:03:30.15,0:03:32.77,Default,,0000,0000,0000,,sellers have more customers \Nthan they need.
Dialogue: 0,0:03:32.96,0:03:37.70,Default,,0000,0000,0000,,As a result, when we have shortages,\Nthe sellers can cut quality,
Dialogue: 0,0:03:37.70,0:03:41.44,Default,,0000,0000,0000,,cut their costs, \Nand still sell everything
Dialogue: 0,0:03:41.44,0:03:44.15,Default,,0000,0000,0000,,they want to sell \Nat the controlled price.
Dialogue: 0,0:03:44.46,0:03:47.58,Default,,0000,0000,0000,,As a result, price controls \Nreduce quality.
Dialogue: 0,0:03:47.58,0:03:49.38,Default,,0000,0000,0000,,We saw this in the 1970s.
Dialogue: 0,0:03:49.38,0:03:51.97,Default,,0000,0000,0000,,Books were printed \Non lower quality paper.
Dialogue: 0,0:03:51.97,0:03:54.15,Default,,0000,0000,0000,,Two-by-four lumber shrank
Dialogue: 0,0:03:54.15,0:03:56.65,Default,,0000,0000,0000,,to one and five-eighths \Nby three and five-eighths.
Dialogue: 0,0:03:56.98,0:03:59.91,Default,,0000,0000,0000,,Automobiles were given \Nfewer coats of paint.
Dialogue: 0,0:03:59.91,0:04:03.14,Default,,0000,0000,0000,,Throughout the U.S. economy,\Nquality began to fall.
Dialogue: 0,0:04:03.87,0:04:06.56,Default,,0000,0000,0000,,Here's another example --\Nthe great matzo ball debate.
Dialogue: 0,0:04:06.63,0:04:11.19,Default,,0000,0000,0000,,In 1972 union leader George Meany\Ncomplained that his favorite soup,\N
Dialogue: 0,0:04:11.19,0:04:14.91,Default,,0000,0000,0000,,Mrs. Adler's, had shrunk \Nfrom four to three matzo balls.
Dialogue: 0,0:04:15.20,0:04:17.46,Default,,0000,0000,0000,,So serious was this \Nthat the Chairman of the Wage
Dialogue: 0,0:04:17.46,0:04:20.70,Default,,0000,0000,0000,,and Price Commission had his staff \Nbuy up a bunch of cans
Dialogue: 0,0:04:20.70,0:04:23.58,Default,,0000,0000,0000,,of Mrs. Adler's soup\Nand count in each one of them
Dialogue: 0,0:04:23.58,0:04:25.90,Default,,0000,0000,0000,,how many matzo balls \Nwere in the soup.
Dialogue: 0,0:04:25.90,0:04:27.64,Default,,0000,0000,0000,,He said there were still four.
Dialogue: 0,0:04:27.64,0:04:31.09,Default,,0000,0000,0000,,Whoever was right, however, \Nthe lesson is quite correct.
Dialogue: 0,0:04:31.28,0:04:33.91,Default,,0000,0000,0000,,Price controls reduce quality.
Dialogue: 0,0:04:35.01,0:04:37.73,Default,,0000,0000,0000,,When the quantity demanded \Nexceeds the quantity supplied,
Dialogue: 0,0:04:37.73,0:04:39.61,Default,,0000,0000,0000,,when there's a surplus of buyers,
Dialogue: 0,0:04:39.61,0:04:42.52,Default,,0000,0000,0000,,sellers have less of an incentive \Nto give good service.
Dialogue: 0,0:04:42.75,0:04:46.30,Default,,0000,0000,0000,,So another way to reduce quality is \Nto reduce service.
Dialogue: 0,0:04:46.72,0:04:50.94,Default,,0000,0000,0000,,And indeed, full-service gasoline \Nstations disappeared in 1973.
Dialogue: 0,0:04:51.01,0:04:52.87,Default,,0000,0000,0000,,The owners would simply \Nclose up shop
Dialogue: 0,0:04:52.87,0:04:54.90,Default,,0000,0000,0000,,whenever they wanted \Nto take a break.
Dialogue: 0,0:04:54.90,0:04:56.81,Default,,0000,0000,0000,,More generally there's \Na reason why
Dialogue: 0,0:04:56.81,0:04:59.29,Default,,0000,0000,0000,,the baristas at Starbucks \Nare pleasant to us.
Dialogue: 0,0:04:59.29,0:05:02.58,Default,,0000,0000,0000,,It's because they want \Nmore customers.
Dialogue: 0,0:05:02.79,0:05:06.53,Default,,0000,0000,0000,,Customers are profitable, \Nbut when you can't raise the price,
Dialogue: 0,0:05:06.53,0:05:09.59,Default,,0000,0000,0000,,when there's a shortage, \Nwhen a seller has more customers
Dialogue: 0,0:05:09.59,0:05:12.67,Default,,0000,0000,0000,,than they need, it doesn't pay \Nto be pleasant to customers.
Dialogue: 0,0:05:12.67,0:05:16.16,Default,,0000,0000,0000,,Indeed, it may pay to be unpleasant \Nto drive some of them off,
Dialogue: 0,0:05:16.16,0:05:18.23,Default,,0000,0000,0000,,so you don't have to serve them.
Dialogue: 0,0:05:18.23,0:05:22.44,Default,,0000,0000,0000,,This is another reason \Nwhy the workers at the DMV are
Dialogue: 0,0:05:22.44,0:05:25.43,Default,,0000,0000,0000,,on average probably \Na little bit less pleasant to us
Dialogue: 0,0:05:25.43,0:05:28.50,Default,,0000,0000,0000,,than at stores \Nwhich require our service,
Dialogue: 0,0:05:28.50,0:05:31.99,Default,,0000,0000,0000,,than at stores which want us \Nto come into the store.
Dialogue: 0,0:05:31.99,0:05:34.56,Default,,0000,0000,0000,,This is a reason why \Nin communist countries
Dialogue: 0,0:05:34.56,0:05:38.24,Default,,0000,0000,0000,,like the ex-Soviet Union, \Nthe workers at the stores were
Dialogue: 0,0:05:38.24,0:05:41.67,Default,,0000,0000,0000,,much more unpleasant \Nthan workers at McDonald's are.
Dialogue: 0,0:05:41.67,0:05:44.96,Default,,0000,0000,0000,,Because McDonald's has an incentive \Nto get more customers,
Dialogue: 0,0:05:44.96,0:05:47.48,Default,,0000,0000,0000,,they want to create \Na pleasant experience.
Dialogue: 0,0:05:47.48,0:05:51.11,Default,,0000,0000,0000,,They want to make it easy \Nto buy goods from the store.
Dialogue: 0,0:05:51.20,0:05:54.50,Default,,0000,0000,0000,,But when there's shortages, \Nwhen there are more customers
Dialogue: 0,0:05:54.60,0:05:57.51,Default,,0000,0000,0000,,than you need, it no longer\Npays to be pleasant.
Dialogue: 0,0:05:57.62,0:06:01.27,Default,,0000,0000,0000,,Okay, price ceilings, let's \Nremember five important effects.
Dialogue: 0,0:06:01.56,0:06:04.29,Default,,0000,0000,0000,,Shortages and reductions \Nin product quality --
Dialogue: 0,0:06:04.29,0:06:05.96,Default,,0000,0000,0000,,that's what we covered today.
Dialogue: 0,0:06:05.98,0:06:08.77,Default,,0000,0000,0000,,Next we will be covering wasteful\Nlines and other search costs,
Dialogue: 0,0:06:08.77,0:06:12.46,Default,,0000,0000,0000,,a loss in gains from trade, \Nand a misallocation of resources.
Dialogue: 0,0:06:13.33,0:06:16.75,Default,,0000,0000,0000,,- [Narrator] If you want to test \Nyourself, click "Practice Questions."
Dialogue: 0,0:06:17.45,0:06:21.07,Default,,0000,0000,0000,,Or, if you're ready to move on,\Njust click "Next Video."
Dialogue: 0,0:06:21.33,0:06:22.98,Default,,0000,0000,0000,,♪ [music] ♪