Price Ceilings: Deadweight Loss
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Not Synced♪ [music] ♪
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Not Synced- [Alex] Today we'll be looking
at how price ceilings -
Not Syncedcreate what economists call
a "deadweight loss." -
Not SyncedThis video will be short
since the ideas ought to be -
Not Syncedpretty familiar by now.
-
Not SyncedLet's dive in.
-
Not SyncedSo let's remind ourselves
that when we have a free market, -
Not Syncedall of the mutually profitable
gains from trade are exploited. -
Not SyncedThat's another way of saying
that a free market -
Not Syncedmaximizes producer
plus consumer surplus. -
Not SyncedNow, when the mutually
profitable gains from trade -
Not Syncedare not fully exploited,
there's lost consumer -
Not Syncedand producer surplus,
or a "deadweight loss." -
Not SyncedThe basic idea --
as long as the price -
Not Syncedthe consumers are willing to pay
exceeds the price that sellers -
Not Syncedare willing to accept,
-
Not Syncedthere are mutually profitable
trades that can be made. -
Not SyncedAnd what we're going to show
is that price ceilings -
Not Syncedcreate a deadweight loss.
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Not SyncedNot all of the mutually profitable
trades will be made. -
Not SyncedLet's take a look.
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Not SyncedOkay, here's our standard diagram.
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Not SyncedI've just labeled some things
we just talked about -
Not Syncedin earlier lectures,
mainly, the shortage -
Not Syncedof the controlled price
and the total value of wasted time. -
Not SyncedThe key point for understanding
the reduced gains from trade -
Not Syncedis that at the free market
equilibrium, -
Not Syncedat this price and this quantity,
Qm, we have more units exchanged -
Not Syncedthan at the price controlled
equilibrium. -
Not SyncedSo with a free market,
we get Qm units exchanged, -
Not Syncedwith a price control,
only Qs units are exchanged -- -
Not Synceda smaller amount.
-
Not SyncedNow notice that these trades,
which fail to take place, -
Not Syncedthey are mutually profitable.
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Not SyncedThat is, the buyers are willing
to pay more for these units -
Not Syncedthan the sellers require
to sell those units. -
Not SyncedSo, because of the price control,
buyers and sellers are not allowed -
Not Syncedto come to a mutually profitable
deal at a price above, -
Not Syncedin this case, $1.
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Not SyncedThey would like to, however.
-
Not SyncedThe buyers are willing to pay $3
for another gallon of gasoline. -
Not SyncedThe sellers are willing to sell
that gasoline for $1. -
Not SyncedSo there's a mutually
profitable trade. -
Not SyncedThis trade would be worth $2
in mutual profit, -
Not Syncedto the buyers and sellers.
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Not SyncedThey would like to make this deal.
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Not SyncedBut it is illegal, it is illegal to sell
at a price above $1. -
Not SyncedSo these trades between Qm
and Qs do not occur. -
Not SyncedIn a free market they would occur,
because they would occur -
Not Syncedthey would generate
additional gains from trade. -
Not SyncedSo compared
to the free market equilibrium, -
Not Syncedunder the price control,
we have lost consumer surplus, -
Not Syncedin the amount of area A.
-
Not SyncedAnd we have lost producer surplus
in the amount of area B. -
Not SyncedTogether, A + B
is the lost gains from trade. -
Not SyncedThese are the mutually profitable
exchanges which fail to take place -
Not Syncedbecause they're illegal
because of the price control. -
Not SyncedSo price ceilings reduce
the gains from trade, -
Not Syncedcreating a deadweight loss.
-
Not Synced- [Narrator] If you want
to test yourself, -
Not Syncedclick "Practice Questions."
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Not SyncedOr, if you're ready to move on,
just click "Next Video." -
Not Synced♪ [music] ♪
- Title:
- Price Ceilings: Deadweight Loss
- Description:
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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 |