Price Ceilings: Deadweight Loss
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0:00 - 0:05♪ [music] ♪
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0:09 - 0:11- [Alex] Today we'll be looking
at how price ceilings -
0:11 - 0:15create what economists call
a "deadweight loss." -
0:15 - 0:17This video will be short
since the ideas ought to be -
0:17 - 0:19pretty familiar by now.
-
0:19 - 0:20Let's dive in.
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0:24 - 0:27So let's remind ourselves
that when we have a free market, -
0:27 - 0:31all of the mutually profitable
gains from trade are exploited. -
0:31 - 0:33That's another way of saying
that a free market -
0:33 - 0:36maximizes producer
plus consumer surplus. -
0:37 - 0:40Now, when the mutually
profitable gains from trade -
0:40 - 0:44are not fully exploited,
there's lost consumer -
0:44 - 0:47and producer surplus,
or a "deadweight loss." -
0:47 - 0:50The basic idea --
as long as the price -
0:50 - 0:54the consumers are willing to pay
exceeds the price that sellers -
0:54 - 0:55are willing to accept,
-
0:55 - 0:58there are mutually profitable
trades that can be made. -
0:58 - 1:00And what we're going to show
is that price ceilings -
1:00 - 1:02create a deadweight loss.
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1:02 - 1:06Not all of the mutually profitable
trades will be made. -
1:06 - 1:07Let's take a look.
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1:07 - 1:09Okay, here's our standard diagram.
-
1:09 - 1:11I've just labeled some things
we talked about -
1:11 - 1:13in earlier lectures,
mainly, the shortage -
1:13 - 1:16of the controlled price
and the total value of wasted time. -
1:17 - 1:20The key point for understanding
the reduced gains from trade -
1:20 - 1:23is that at the free market
equilibrium, -
1:23 - 1:28at this price and this quantity,
Qm, we have more units exchanged -
1:28 - 1:32than at the price controlled
equilibrium. -
1:32 - 1:35So with a free market,
we get Qm units exchanged, -
1:35 - 1:38with a price control,
only Qs units are exchanged -- -
1:38 - 1:40a smaller amount.
-
1:40 - 1:44Now notice that these trades,
which fail to take place, -
1:44 - 1:46they are mutually profitable.
-
1:46 - 1:51That is, the buyers are willing
to pay more for these units -
1:51 - 1:55than the sellers require
to sell those units. -
1:56 - 2:01So, because of the price control,
buyers and sellers are not allowed -
2:02 - 2:06to come to a mutually profitable
deal at a price above, -
2:06 - 2:08in this case, $1.
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2:08 - 2:10They would like to, however.
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2:10 - 2:14The buyers are willing to pay $3
for another gallon of gasoline. -
2:14 - 2:19The sellers are willing to sell
that gasoline for $1. -
2:19 - 2:21So there's a mutually
profitable trade. -
2:21 - 2:25This trade would be worth $2
in mutual profit, -
2:25 - 2:26to the buyers and sellers.
-
2:26 - 2:28They would like to make this deal.
-
2:28 - 2:33But it is illegal, it is illegal to sell
at a price above $1. -
2:34 - 2:38So these trades between Qm
and Qs do not occur. -
2:38 - 2:42In a free market they would occur,
and because they would occur, -
2:42 - 2:46they would generate
additional gains from trade. -
2:46 - 2:49So compared
to the free market equilibrium, -
2:49 - 2:54under the price control,
we have lost consumer surplus, -
2:54 - 2:56in the amount of area A.
-
2:56 - 3:01And we have lost producer surplus
in the amount of area B. -
3:01 - 3:05Together, A + B
is the lost gains from trade. -
3:05 - 3:10These are the mutually profitable
exchanges which fail to take place -
3:10 - 3:14because they're illegal,
because of the price control. -
3:14 - 3:17So price ceilings reduce
the gains from trade, -
3:17 - 3:19creating a deadweight loss.
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3:20 - 3:21- [Narrator] If you want
to test yourself, -
3:21 - 3:23click "Practice Questions."
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3:23 - 3:27Or, if you're ready to move on,
just click "Next Video." -
3:27 - 3:31♪ [music] ♪
- Title:
- Price Ceilings: Deadweight Loss
- Description:
-
In this video, we explore the fourth unintended consequence of price ceilings: deadweight loss. When prices are controlled, the mutually profitable gains from free trade cannot be fully realized, creating deadweight loss. With price controls, less trading occurs and both buyers and sellers miss out on the mutually profitable gains that could have occurred. We’ll show how to calculate deadweight loss using our example of a price ceiling on gasoline.
Microeconomics Course: http://mruniversity.com/courses/principles-economics-microeconomics
Ask a question about the video: http://mruniversity.com/courses/principles-economics-microeconomics/price-ceiling-deadweight-loss#QandA
Next video: http://mruniversity.com/courses/principles-economics-microeconomics/price-ceiling-misallocation-of-resources
- Video Language:
- English
- Team:
- Marginal Revolution University
- Project:
- Micro
- Duration:
- 03:33
Martel Espiritu edited English subtitles for Price Ceilings: Deadweight Loss | ||
Martel Espiritu edited English subtitles for Price Ceilings: Deadweight Loss | ||
Martel Espiritu edited English subtitles for Price Ceilings: Deadweight Loss | ||
MRU2 edited English subtitles for Price Ceilings: Deadweight Loss | ||
MRU2 edited English subtitles for Price Ceilings: Deadweight Loss | ||
MRU2 edited English subtitles for Price Ceilings: Deadweight Loss |