Price Ceilings: Shortages and Quality Reduction
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0:00 - 0:07♪ [music] ♪
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0:07 - 0:11- [Alex] In the next several videos,
we'll dive deeper -
0:11 - 0:14into price ceilings
and also price floors. -
0:14 - 0:19These are important
for two reasons. -
0:19 - 0:20First, governments around
the world, both today -
0:20 - 0:23and historically, often do impose
price ceilings and floors -
0:23 - 0:25so we want to
understand their effects. -
0:25 - 0:32Second, in the last section,
we explained how a price is -
0:32 - 0:34a signal wrapped up
in an incentive. -
0:34 - 0:35In this section, we'll be
explaining what happens -
0:35 - 0:37when that signal, that price,
is not allowed to do its work. -
0:37 - 0:42When the price is not
allowed to rise or fall, -
0:42 - 0:45what happens when
that signal is not sent? -
0:45 - 0:48What happens when that
incentive is taken away? -
0:53 - 0:55A price ceiling is a maximum price
allowed by law. -
0:55 - 0:58So for example, if the price
ceiling on gasoline is $2.50, -
0:58 - 1:05it is illegal to buy or sell
gasoline at above that price. -
1:05 - 1:08It's called a ceiling
because you cannot go -
1:08 - 1:11above the ceiling.
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1:11 - 1:14So a ceiling is a maximum price.
-
1:14 - 1:17It has five important effects.
-
1:17 - 1:24It's going to create shortages,
reductions in product quality, -
1:24 - 1:27wasteful lines
and other search costs, -
1:27 - 1:28a loss in gains from trade,
or a deadweight loss, -
1:28 - 1:31and a misallocation of resources.
-
1:31 - 1:33We're going to go through
each of these -- -
1:33 - 1:34let's begin with shortages.
-
1:34 - 1:36We can easily show
that price ceilings create shortages -
1:36 - 1:40using our standard
demand and supply framework. -
1:40 - 1:42We'll use the price of gasoline
as an example -
1:42 - 1:45because governments often
have imposed -
1:45 - 1:48a maximum price on gasoline.
-
1:48 - 1:50Now, ordinarily, we would know
that the market equilibrium -
1:50 - 1:53would be found
where the quantity demanded -
1:53 - 1:54is equal to the quantity supplied.
-
1:54 - 1:57But suppose that the government
imposes a maximum price -
1:57 - 2:03which is below
the market equilibrium. -
2:03 - 2:06So, this is a controlled price,
a maximum price -
2:06 - 2:09above which it is illegal
to buy or sell this good. -
2:09 - 2:12What we want to do now is
-
2:12 - 2:15simply read off the diagram
what happens. -
2:15 - 2:17So at the controlled price,
we can read -
2:17 - 2:20that the quantity demanded
given by the demand curve, is here. -
2:20 - 2:25At the controlled price,
the quantity supplied is -
2:25 - 2:27given by the supply curve
and is read here. -
2:27 - 2:30Notice that at the controlled price,
the quantity demanded -
2:30 - 2:34exceeds the quantity supplied
and that's the shortage. -
2:35 - 2:37Now, ordinarily, if the quantity
demanded exceeded -
2:37 - 2:40the quantity supplied,
buyers want more of this good -
2:40 - 2:46than they're able
to get at the current price. -
2:46 - 2:51Ordinarily, the buyers would
compete to push the price up, -
2:51 - 2:52and the price would increase
to the market price, -
2:52 - 2:54and we would get
the usual equilibrium. -
2:54 - 2:56In this case, however, it's illegal
to push the price up. -
2:56 - 2:59As a result, the quantity demanded
exceeds the quantity supplied, -
2:59 - 3:04and we get this shortage
which doesn't go away. -
3:04 - 3:10The shortage is defined
simply as the amount -
3:10 - 3:12by which the quantity demanded
exceeds the quantity supplied -
3:12 - 3:15at the controlled price.
-
3:15 - 3:17Let's give some examples.
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3:17 - 3:20When goods are in shortage,
that is when the quantity -
3:20 - 3:23demanded exceeds
the quantity supplied, -
3:23 - 3:26sellers have more
customers than goods. -
3:26 - 3:27Usually, sellers have
to compete to get customers, -
3:27 - 3:30but when goods are in shortage,
-
3:30 - 3:33sellers have more customers
than they need. -
3:33 - 3:36As a result, when we have shortages,
the sellers can cut quality, -
3:36 - 3:42cut their costs,
and still sell everything -
3:42 - 3:44they want to sell
at the controlled price. -
3:45 - 3:47As a result, price controls
reduce quality. -
3:47 - 3:50We saw this in the 1970s.
-
3:50 - 3:52Books were printed
on lower quality paper. -
3:52 - 3:55Two-by-four lumber shrank
-
3:55 - 3:59to one and five-eighths
by three and five-eighths. -
4:00 - 4:02Automobiles were given
fewer coats of paint. -
4:02 - 4:03Throughout the U.S. economy,
quality began to fall. -
4:03 - 4:05Here's another example --
the great Matzo Ball Debate. -
4:05 - 4:10In 1972 union leader George Meany
complained that his favorite soup, -
4:10 - 4:14Mrs. Adler's, had shrunk
from four to three matzo balls. -
4:14 - 4:18So serious was this
that the Chairman of the Wage -
4:19 - 4:21and Price Commission had his staff
buy up a bunch of cans -
4:21 - 4:24of Mrs. Adler's soup
and count in each one of them -
4:24 - 4:25how many matzo balls
were in the soup. -
4:25 - 4:28He said there were still four.
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4:28 - 4:31Whoever was right, however,
the lesson is quite correct. -
4:31 - 4:34Price controls reduce quality.
-
4:34 - 4:36When the quantity demanded
exceeds the quantity supplied, -
4:36 - 4:39when there's a surplus of buyers,
-
4:39 - 4:43sellers have less of an incentive
to give good service. -
4:44 - 4:49Another way to reduce quality is
to reduce service. -
4:49 - 4:53And indeed, full-service gasoline
stations disappeared in 1973. -
4:53 - 4:55The owners would simply
close up shop -
4:55 - 4:58whenever they wanted
to take a break. -
4:58 - 4:59More generally there's
a reason why -
4:59 - 5:00the baristas at Starbucks
are pleasant to us. -
5:00 - 5:05It's because they want
more customers. -
5:06 - 5:07Customers are profitable,
but when you can't raise the price, -
5:07 - 5:10when there's a shortage,
when a seller has more customers -
5:10 - 5:14than they need, it doesn't pay
to be pleasant to customers. -
5:14 - 5:16Indeed, it may pay to be unpleasant
to drive some of them off, -
5:16 - 5:19so you don't have to serve them.
-
5:19 - 5:21This is another reason
why the workers at the DMV are -
5:21 - 5:24on average probably
a little bit less pleasant to us -
5:24 - 5:29than at stores
which require our service -
5:29 - 5:32than the stores which want us
to come into the store. -
5:32 - 5:35This is a reason why
in communist countries -
5:35 - 5:40like the ex-Soviet Union,
the workers at the stores were -
5:40 - 5:44much more unpleasant
than workers in McDonald's are. -
5:45 - 5:46Because McDonald's has an incentive
to get more customers, -
5:46 - 5:47they want to create
a pleasant experience. -
5:47 - 5:49They want to make it easy
to buy goods from the store. -
5:49 - 5:55But when there's shortages,
when there are more customers -
5:55 - 5:58than you need, it no longer
pays to be pleasant. -
5:59 - 6:02Okay, price ceilings, let's
remember five important effects. -
6:02 - 6:04Shortages and reductions
in product quality -- -
6:04 - 6:06that's what we covered today.
-
6:06 - 6:09Next we will be covering wasteful
lines and other search costs, -
6:09 - 6:13a loss in gains from trade,
and a misallocation of resources. -
6:13 - 6:16- [Narrator] If you want to test
yourself, click "Practice Questions." -
6:16 - 6:19Or, if you're ready to move on,
just click "Next Video." -
Not Synced♪ [music] ♪
- Title:
- Price Ceilings: Shortages and Quality Reduction
- Description:
-
Price ceilings result in five major unintended consequences, and in this video we cover two of them. Using the supply and demand curve, we show how price ceilings lead to a shortage of goods and to low quality goods. Prices are signals that indicate to suppliers how much is being demanded, but when prices are kept artificially low with price ceilings, suppliers have no way of knowing how many goods they should produce and sell, leading to a shortage of goods. Quality also decreases under price controls. Do you ever wonder why the quality of customer service at Starbucks is generally better than at the DMV? The answer lies in incentives and price ceilings. We’ll discuss further in this video.
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- Video Language:
- English
- Team:
- Marginal Revolution University
- Project:
- Micro
- Duration:
- 06:26
Kirstin Cosper edited English subtitles for Price Ceilings: Shortages and Quality Reduction | ||
Kirstin Cosper edited English subtitles for Price Ceilings: Shortages and Quality Reduction | ||
Kirstin Cosper edited English subtitles for Price Ceilings: Shortages and Quality Reduction | ||
Kirstin Cosper edited English subtitles for Price Ceilings: Shortages and Quality Reduction | ||
Kirstin Cosper edited English subtitles for Price Ceilings: Shortages and Quality Reduction | ||
Kirstin Cosper edited English subtitles for Price Ceilings: Shortages and Quality Reduction | ||
MRU2 edited English subtitles for Price Ceilings: Shortages and Quality Reduction | ||
MRU2 edited English subtitles for Price Ceilings: Shortages and Quality Reduction |