Price Controls and Communism

What happens when the prices of all goods are controlled? Under communism, or a command economy, this is exactly what occurs. As a result, all of the effects of price controls become amplified: there are even more shortages or surpluses of goods, lower product quality, longer lines and more search costs, more losses in gains from trade, and more misallocation of resources. As we have seen, universal price controls destroy market coordination and create a system of planned chaos in which it becomes more difficult for consumers to get the goods and services they want and need.
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- [Alex] We conclude
our discussion of price controls

by talking about price controls
and communism,

or planned economy.

This will be brief
because the idea is pretty simple.

We've already looked
at all the effects

of price controls
in different markets.

But we can think about communism
as being in some ways

a system of universal
price controls.

Everything is controlled
by the government.

The price of all goods
is controlled by the government.

So if a single price control
can have bad effects,

what happens when you control
the prices of all goods?

Let's take a look.

Let's just remind ourselves

of some of the important effects
of price control,

both ceilings and floors.

Shortages and surpluses,
depending upon whether

we have the price
below the market price

or the floor above the market price.

Reductions in product quality
or sometimes too much quality,

too much waste.

Wasteful lines
and other search costs.

Loss in gains from trade,
and misallocation of resources.

Now communism, a command economy,

can be thought of as a system
of universal price controls,

price controls on all goods.

And we saw exactly
these five elements

occurring in countries

which had universal price controls,
such as the Soviet Union.

It was common for some goods
to be in shortage

while other goods had surpluses.

Low-quality goods for most,
with wasteful quality for other,

wasteful lines
and other search costs.

During the Soviet Union
communist period,

it was common for women
to spend, on average,

two hours of every single day,

weekdays and weekends,

just lining up
to get consumer goods.

Clear loss of gains from trade
and a misallocation of resources.

So it was very common
in the Soviet Union

to spend lots of resources
producing agricultural products,

and then not have the trucks
to bring those products to market.

It was common
to be producing radios,

have everything you need
to produce the radio,

except for one single part
which was in shortage,

so you could not produce the radios.

Remember the situation
we described for heating oil

in the United States
during the 1970s,

when in some parts of the country
there was plenty of heating oil?

There was enough heating oil

so that people were heating
their swimming pools,

while in other parts of the country

there wasn't enough and people
were shivering in their homes.

Those types of misallocation
of resources were the norm,

were normal,

were everyday occurrences
in the Soviet Union

during its system of communism,

or a command economy,
or universal price controls.

All of these issues came to affect
an entire economy.

In short, what communism did really

was a substitution
of planned chaos,

a chaotic economic system,

instead of having
market coordination.

Okay, thanks very much.

That will conclude our lectures
on price controls.

- [Narrator] If you want
to test yourself,

click "Practice Questions,"

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

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