WEBVTT

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♪ (music) ♪

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- [Alex] In the last video,
Tyler introduced the topic

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of slave redemption

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and how elasticity can help us
to understand its consequences.

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In this video,
we'll dive deeper into this problem

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and show how to analyze it using
supply, demand, and elasticity.

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We'll also look
at some other real world

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applications of elasticity.

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Let's get started.

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- [Tyler] Okay, let's begin our analysis.

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We'll put the price of slaves
on the vertical axis,

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the quantity on the horizontal axis.

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And this is the demand for slaves
from potential slave owners.

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So, this is the demand --
if you like -- from the bad guys.

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It often helps in these situations
to begin with a polar case.

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So let's assume to start
with that the supply of slaves

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is perfectly inelastic --
that is, it doesn't respond at all --

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quantity supplied of slaves
does not respond to the price.

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Given these assumptions,
the equilibrium is found at point A

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with a price of slaves
of $15 per slave

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and with 1,000 people being enslaved --

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being put into captivity

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every period --
every year, in this case.

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Now...

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what does the redemption program do?

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Well, what the redemption
program does is it increases

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the demand for slaves.

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So the demand for slaves

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now shifts out --
twists out -- to this red curve.

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And this is the demand
from the potential slave owners

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plus the demand from the redeemers.

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So, this is the total
demand for slaves.

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And with that new
increased total demand,

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what we see
is the equilibrium is at point B

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with a price of slaves
of $50 per slave.

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Now -- that increased price
of slaves is a good thing

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from the point of view
of the program

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because it's precisely
that higher price

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which is going to discourage
the potential slave owners

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from buying slaves.

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It's that higher price
which prices them out of the market.

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What the redeemers are really doing

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is they're making
slaves too expensive

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for potential slave owners to buy.

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So the potential slave owners

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start off at a price of $15
buying 1,000 slaves.

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At the higher price of $50,

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the potential slave owners
only buy 200 slaves.

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So, 200 slaves end up
being held in captivity

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after the redemption
program -- per year --

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compared to 1,000
before the redemption program.

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So, what the redemption program does
is it ends up freeing 800 slaves.

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And in this situation

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where the supply curve
is perfectly inelastic,

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the program works quite well --

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in the sense that every freed slave

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would have been a slave

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had it not been
for the redemption program.

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That is --
of these 800 freed slaves --

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all of them
would have been held in captivity

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were it not
for the redemption program.

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And what we're going
to see in a minute,

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is that when the supply curve
is more elastic, that's not the case.

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When the supply curve is more elastic,

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the redemption program itself
can increase the number of people

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who are enslaved
at least for a period of time.

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So let's take a look now

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at the case where the supply
curve is more elastic.

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So now, we're basically
going to repeat the analysis

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but with a more elastic supply curve.

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So here's our demand curve --
just the same as we had it before.

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Here's our more
elastic supply curve.

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Notice that I've drawn the curves

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so that the equilibrium is exactly
the same as it was before --

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that is, at point A.

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The price of slaves
is $15 per slave

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and there are 1,000 people

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who are enslaved
in our initial equilibrium --

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again -- exactly as we had before.

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Now, what does
the redemption program do?

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It increases the demand for slaves.

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At the new higher demand --
okay, we’re at point B --

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is our new equilibrium.

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At point B,

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notice that the price
of slaves is $30 per slave.

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Not $50 per slave --

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the price has not gone
up as much as it did before.

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Why not?

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Well, the price hasn't gone
up as much as it did before

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because now the higher price
induces a greater quantity supplied.

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So now,
what the redeemers have done

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by increasing
the demand for slaves,

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they've increased
the incentive of the slave traders

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to go out and capture more slaves.

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And indeed, before,

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the slave traders were capturing
1,000 people per period --

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now they're capturing
2,200 people per period.

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So there's been
an increase of people

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who are enslaved --
who are put into slavery -- of 1,200.

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The program still works
in the following sense.

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The quantity of slaves

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demanded by the potential
slave owners does fall,

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not as much as before

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because the price
isn't driven up as high.

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But the price rises from $15 to $30

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and that reduces
the quantity of slaves

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demanded by the potential
slave owners to 600.

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So the program
is still successful

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in the sense
that before the program begins,

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1,000 people are held in captivity.

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After the program,
only 600 people are held in captivity,

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so 400 people are freed.

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However, those 400 net freed

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come at a high price

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because now...

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...1,200 additional people

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are put into slavery --
at least, for some period of time.

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A bunch of them
are then bought up

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but 1,200 of the 1,600 people

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who are redeemed
would not have been slaves

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had it not been
for the redemption program.

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So the redemption program ends up

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in a sense, freeing more people --

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the number of people
freed on the books is 1,600.

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But 1,200 of those

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wouldn't have been slaves

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had it not been
for the redemption program itself

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driving up the price of slaves

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and the incentive
to capture more slaves.

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So, on net, only 400 people
are actually freed.

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So the program is less successful

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when the supply curve
is more elastic,

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really, for two reasons.

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First,

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the number of people
who are freed on net goes down --

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we don't get as big a drop
in the quantity of slaves demanded

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because the price
doesn't go up as much.

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The second reason, however,

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is that in order
to get that net freed,

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we've actually created more slaves,

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we've actually created
more people who are captured.

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So, at the end of the day,

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400 people are still freed.

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On net, fewer people end up
being slaves at the end of the day,

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but to get there,
at the beginning of the day,

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we've got a lot more
people who are enslaved --

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who were taken
by the slave traders.

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So, this makes it very difficult.

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The more elastic
the supply curve is,

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the less successful
the program can be

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and the more of these terrible,
terrible trade-offs that there are.

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And if we remember
some of the facts about elasticity --

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in particular, remember...

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supply curves get more
elastic in the long run --

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well that's exactly what we saw
in the case in the Sudan.

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At the beginning,

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the redemption program
increased the price of slaves a lot,

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but as the supply curve
became more elastic over time,

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the price of slaves began
to fall back down again --

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it was not increased by as much.

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And thus, this redemption program

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became less successful over time.

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So, this is a very tricky issue.

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It's a very controversial issue.

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Did the groups like Christian
Solidarity International --

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were they on net helpful?

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There are these terrible trade-offs.

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Economics can't answer this question,

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but it can at least point
to the supply response

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and what that means in moral terms.

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Let's look at another application.

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Let's look at another
important question

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which we can analyze
using demand and supply.

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What is the effect of gun buybacks?

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Now these buybacks

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are often sponsored
by local governments,

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the local police,
the local mayor and so forth.

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In this buyback --
which was held in Oakland --

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the officials offered $250 cash

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for each working gun,
no questions asked.

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They then collected the guns
and they melted them down.

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The idea was to get
guns off the street.

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They ended up collecting
about 500 guns in this buyback.

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These buybacks are often held.

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There's been one
in Washington, D.C.

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and Rochester, New York,
and throughout the United States.

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They're fairly common,
again, at the local level.

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The question is:
can these buybacks be effective?

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And to answer that we need
to make some assumptions

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or we need to know something
about demand and supply.

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In particular,

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what assumptions would make sense

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about the elasticity of supply?

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Is the supply curve of guns
to a city like Washington, D.C.

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or Oakland, California --

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is that supply curve going
to be inelastic or elastic?

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Bear in mind what that means.

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So we're looking

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at the elasticity of supply

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of guns in a city

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like Washington, D.C. or a town.

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Also bear in mind

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that the United States as a whole --

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there are hundreds
of millions of guns --

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and that guns continue
to be produced, manufactured,

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bought and sold, every day.

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So what assumptions would you make

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about the local supply curve

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of guns in a city
like Washington, D.C.?

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Think about that.

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I'll give you an answer
on the next slide.

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The supply of guns
to a local region

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is going to be very elastic.

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Remember our earlier example

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of suppose that we have an increase

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in demand for gasoline
in Washington, D.C. --

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is that going to increase the price
of gasoline in Washington, D.C.?

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The answer is no --

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because just a tiny
increase in price

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and lots of gasoline
will come in from Virginia,

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from Maryland,
from other states in the country.

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Remember,
the more local the supply,

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the more elastic the supply curve.

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So, an increase in the demand
for gasoline in Washington, D.C. --

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that's not going to increase
the world price of gasoline.

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And it's not even going to increase

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the price of gasoline
in Washington, D.C.,

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because if it did,

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people would start
to sell gas in Washington, D.C.

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instead of next door,
in Virginia or Maryland.

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So the price has got
to be about the same

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throughout the United States.

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The same thing is true for guns.

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The supply of guns
to a local region

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like Oakland or Washington, D.C.
is going to be very elastic.

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That has surprising facts.

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It means that local buybacks

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won't affect the number
of guns on the street

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nor even their price.

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Let's take a look
at the diagram.

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Here is our demand curve for guns.

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Here's our supply curve,

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which is drawn very elastic

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because it's a local market.

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The initial equilibrium is at point A

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at a certain price of guns
and a certain quantity of guns

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traded each period.

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What the buyback
does is it increases

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the demand for guns,

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shifting the equilibrium to point B.

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So the buyback --
they end up buying a lot of guns,

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but all of the guns
they end up buying

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come from the increase
in the quantity supplied.

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Notice that the buyback
doesn't push the price of guns up.

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Because it doesn't push
the price of guns up,

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no one stops buying a gun.

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Remember, a buyback
is going to be effective

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only if it makes guns
more expensive --

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only if it reduces
the quantity demanded of guns.

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Since all of the increase in supply

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is being generated
by the buyback itself,

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the buyback doesn't increase
the price of guns in Washington, D.C.,

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therefore it doesn't reduce
the quantity demanded of guns

00:12:46.216 --> 00:12:47.739
in Washington, D.C.,

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therefore no effect
on the number of guns held.

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Now in particular,
what's going to happen

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is that if the mayor
offers $250 for a gun,

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people are going
to go into their closet,

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they're going to find
an old low-quality gun --

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a gun they don't really want.

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They're going to turn
that in and maybe a few weeks

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or a few months later,
they're going to buy a new gun.

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Think about it this way.

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Imagine for whatever odd reason

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that the government
in Washington, D.C.

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wanted to reduce the number
of people wearing sneakers.

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So they offered
a sneaker buyback.

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For $50, they would buy any pair
of sneakers -- no questions asked.

00:13:29.498 --> 00:13:31.980
Well, of course people are going
to go into their closet,

00:13:31.980 --> 00:13:33.665
they're going to find
old pairs of sneakers

00:13:33.665 --> 00:13:36.692
they don't really want anymore
and they're going to turn those in.

00:13:36.692 --> 00:13:37.737
They're going to sell --

00:13:37.737 --> 00:13:40.414
they're going to sell
those sneakers to the government.

00:13:40.692 --> 00:13:43.482
But -- is anyone in Washington, D.C.

00:13:43.482 --> 00:13:47.478
going to end up,
in the long run, going shoeless?

00:13:47.478 --> 00:13:50.051
Even going sneaker-less? No.

00:13:50.051 --> 00:13:51.638
They may turn their sneakers in,

00:13:51.638 --> 00:13:53.782
but a few weeks
a few months later,

00:13:53.782 --> 00:13:55.995
they're going to be buying
a new pair of sneakers.

00:13:55.995 --> 00:13:58.267
We haven't changed
the price of sneakers,

00:13:58.267 --> 00:14:01.368
therefore we haven't changed
the quantity demanded of sneakers,

00:14:01.368 --> 00:14:05.131
therefore we're going
to stay at the equilibrium.

00:14:05.131 --> 00:14:06.755
Once the buyback is over,

00:14:06.755 --> 00:14:10.010
we're going to be
at the same equilibrium at point A.

00:14:10.693 --> 00:14:13.845
So local gun buybacks don't work.

00:14:13.845 --> 00:14:17.413
They're really --
in my view -- a waste of time.

00:14:17.924 --> 00:14:20.411
This doesn't mean
that we can't do anything.

00:14:20.411 --> 00:14:22.544
We may want to put
more police on the street,

00:14:22.544 --> 00:14:25.114
we may want
to fight crime in other ways,

00:14:25.114 --> 00:14:27.439
but a local gun buyback
isn't going to work.

00:14:28.101 --> 00:14:30.231
Another point, a few countries,

00:14:30.231 --> 00:14:33.534
such as Australia,
that had required buybacks,

00:14:33.534 --> 00:14:35.097
mandatory buybacks,

00:14:35.097 --> 00:14:37.517
where they banned guns
and then, buy them back.

00:14:37.517 --> 00:14:41.784
Well, since that's, A Mandatory,
and B for the country as a whole,

00:14:41.784 --> 00:14:44.068
that might get guns off the street,

00:14:44.068 --> 00:14:49.302
but here, we're talking
about a local buyback.

00:14:49.614 --> 00:14:52.082
And because
of the elasticity of supply,

00:14:52.082 --> 00:14:54.018
it's not going to affect
the number of guns

00:14:54.018 --> 00:14:57.230
on the local streets
nor even their price

00:14:57.230 --> 00:15:01.060
and thus it's going to be,
in my view, completely ineffective.

00:15:02.299 --> 00:15:06.115
It's really quite amazing
how a little bit of economics

00:15:06.115 --> 00:15:08.108
can go a long way

00:15:08.108 --> 00:15:11.049
to understanding
and improving public policy.

00:15:11.659 --> 00:15:13.723
Hopefully, you see the argument

00:15:13.723 --> 00:15:16.244
about the elasticity
of supply of guns

00:15:16.244 --> 00:15:19.399
and yet we see these policies
being passed all the time,

00:15:19.399 --> 00:15:23.251
these ineffective policies
are actually often put into place.

00:15:23.251 --> 00:15:24.691
A little bit of economics

00:15:24.691 --> 00:15:27.541
goes a long way
to improving public policy,

00:15:27.541 --> 00:15:29.493
if only we can get the message out.

00:15:30.008 --> 00:15:34.253
Okay, thanks very much.
See you next chapter.

00:15:36.362 --> 00:15:39.315
- [Narrator] If you want to test
yourself, click “Practice Questions.”

00:15:40.115 --> 00:15:43.476
Or, if you're ready to move on,
just click “Next Video.”

00:15:43.476 --> 00:15:47.845
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