Price Ceilings: Shortages and Quality Reduction
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Not Synced♪ [music] ♪
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Not Synced- [Alex] In the next several videos,
we'll dive deeper -
Not Syncedinto price ceilings
and also price floors. -
Not SyncedThese are important
for two reasons. -
Not SyncedFirst, governments around
the world, both today -
Not Syncedand historically, often do impose
price ceilings and floors -
Not Syncedso we want to
understand their effects. -
Not SyncedSecond, in the last section,
we explained how a price is -
Not Synceda signal wrapped up
in an incentive. -
Not SyncedIn this section, we'll be
explaining what happens -
Not Syncedwhen that signal, that price,
is not allowed to do its work. -
Not SyncedWhen the price is not
allowed to rise or fall, -
Not Syncedwhat happens when
that signal is not sent? -
Not SyncedWhat happens when that
incentive is taken away? -
Not SyncedA price ceiling is a maximum price
allowed by law. -
Not SyncedSo for example, if the price
ceiling on gasoline is $2.50, -
Not Syncedit is illegal to buy or sell
gasoline at above that price. -
Not SyncedIt's called a ceiling
because you cannot go -
Not Syncedabove the ceiling.
-
Not SyncedSo a ceiling is a maximum price.
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Not SyncedIt has five important effects.
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Not SyncedIt's going to create shortages,
reductions in product quality, -
Not Syncedwasteful lines
and other search costs, -
Not Synceda loss in gains from trade,
or a deadweight loss, -
Not Syncedand a misallocation of resources.
-
Not SyncedWe're going to go through
each of these -- -
Not Syncedlet's begin with shortages.
-
Not SyncedWe can easily show
that price ceilings create shortages -
Not Syncedusing our standard
demand and supply framework. -
Not SyncedWe'll use the price of gasoline
as an example -
Not Syncedbecause governments often
have imposed -
Not Synceda maximum price on gasoline.
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Not SyncedNow, ordinarily, we would know
that the market equilibrium -
Not Syncedwould be found
where the quantity demanded -
Not Syncedis equal to the quantity supplied.
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Not SyncedBut suppose that the government
imposes a maximum price -
Not Syncedwhich is below
the market equilibrium. -
Not SyncedSo, this is a controlled price,
a maximum price -
Not Syncedabove which it is illegal
to buy or sell this good. -
Not SyncedWhat we want to do now is
-
Not Syncedsimply read off the diagram
what happens. -
Not SyncedSo at the controlled price,
we can read -
Not Syncedthat the quantity demanded
given by the demand curve, is here. -
Not SyncedAt the controlled price,
the quantity supplied is -
Not Syncedgiven by the supply curve
and is read here. -
Not SyncedNotice that at the controlled price,
the quantity demanded -
Not Syncedexceeds the quantity supplied
and that's the shortage. -
Not SyncedNow, ordinarily, if the quantity
demanded exceeded -
Not Syncedthe quantity supplied,
buyers want more of this good -
Not Syncedthan they're able
to get at the current price. -
Not SyncedOrdinarily, the buyers would
compete to push the price up, -
Not Syncedand the price would increase
to the market price, -
Not Syncedand we would get
the usual equilibrium. -
Not SyncedIn this case, however, it's illegal
to push the price up. -
Not SyncedAs a result, the quantity demanded
exceeds the quantity supplied, -
Not Syncedand we get this shortage
which doesn't go away. -
Not SyncedThe shortage is defined
simply as the amount -
Not Syncedby which the quantity demanded
exceeds the quantity supplied -
Not Syncedat the controlled price.
-
Not SyncedLet's give some examples.
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Not SyncedWhen goods are in shortage,
that is when the quantity -
Not Synceddemanded exceeds
the quantity supplied, -
Not Syncedsellers have more
customers than goods. -
Not SyncedUsually, sellers have
to compete to get customers, -
Not Syncedbut when goods are in shortage,
-
Not Syncedsellers have more customers
than they need. -
Not SyncedAs a result, when we have shortages,
the sellers can cut quality, -
Not Syncedcut their costs,
and still sell everything -
Not Syncedthey want to sell
at the controlled price. -
Not SyncedAs a result, price controls
reduce quality. -
Not SyncedWe saw this in the 1970s.
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Not SyncedBooks were printed
on lower quality paper. -
Not SyncedTwo-by-four lumber shrank
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Not Syncedto one and five-eighths
by three and five-eighths. -
Not SyncedAutomobiles were given
fewer coats of paint. -
Not SyncedThroughout the U.S. economy,
quality began to fall. -
Not SyncedHere's another example --
the great Matzo Ball Debate. -
Not SyncedIn 1972 union leader George Meany
complained that his favorite soup, -
Not SyncedMrs. Adler's, had shrunk
from four to three matzo balls. -
Not SyncedSo serious was this
that the Chairman of the Wage -
Not Syncedand Price Commission had his staff
buy up a bunch of cans -
Not Syncedof Mrs. Adler's soup
and count in each one of them -
Not Syncedhow many matzo balls
were in the soup. -
Not SyncedHe said there were still four.
-
Not SyncedWhoever was right, however,
the lesson is quite correct. -
Not SyncedPrice controls reduce quality.
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Not SyncedWhen the quantity demanded
exceeds the quantity supplied, -
Not Syncedwhen there's a surplus of buyers,
-
Not Syncedsellers have less of an incentive
to give good service. -
Not SyncedAnother way to reduce quality is
to reduce service. -
Not SyncedAnd indeed, full-service gasoline
stations disappeared in 1973. -
Not SyncedThe owners would simply
close up shop -
Not Syncedwhenever they wanted
to take a break. -
Not SyncedMore generally there's
a reason why -
Not Syncedthe baristas at Starbucks
are pleasant to us. -
Not SyncedIt's because they want
more customers. -
Not SyncedCustomers are profitable,
but when you can't raise the price, -
Not Syncedwhen there's a shortage,
when a seller has more customers -
Not Syncedthan they need, it doesn't pay
to be pleasant to customers. -
Not SyncedIndeed, it may pay to be unpleasant
to drive some of them off, -
Not Syncedso you don't have to serve them.
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Not SyncedThis is another reason
why the workers at the DMV are -
Not Syncedon average probably
a little bit less pleasant to us -
Not Syncedthan at stores
which require our service -
Not Syncedthan the stores which want us
to come into the store. -
Not SyncedThis is a reason why
in communist countries -
Not Syncedlike the ex-Soviet Union,
the workers at the stores were -
Not Syncedmuch more unpleasant
than workers in McDonald's are. -
Not SyncedBecause McDonald's has an incentive
to get more customers, -
Not Syncedthey want to create
a pleasant experience. -
Not SyncedThey want to make it easy
to buy goods from the store. -
Not SyncedBut when there's shortages,
when there are more customers -
Not Syncedthan you need, it no longer
pays to be pleasant. -
Not SyncedOkay, price ceilings, let's
remember five important effects. -
Not SyncedShortages and reductions
in product quality -- -
Not Syncedthat's what we covered today.
-
Not SyncedNext we will be covering wasteful
lines and other search costs, -
Not Synceda loss in gains from trade,
and a misallocation of resources. -
Not Synced- [Narrator] If you want to test
yourself, click "Practice Questions." -
Not SyncedOr, 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 |