Price Ceilings: The US Economy Flounders in the 1970s

In 1971, President Nixon, in an effort to control inflation, declared price increases illegal. Because prices couldn’t increase, they began hitting a ceiling. With a price ceiling, buyers are unable to signal their increased demand by bidding prices up, and suppliers have no incentive to increase quantity supplied because they can’t raise the price.

What results when the quantity demanded exceeds the quantity supplied? A shortage! In the 1970s, for example, buyers began to signal their demand for gasoline by waiting in long lines, if they even had access to gasoline at all. As you’ll recall from the previous section on the price system, prices help coordinate global economic activity. And with price controls in place, the economy became far less coordinated. Join us as we look at real-world examples of price controls and the grave effects these regulations have on trade and industry.
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- [President Nixon] I am today
ordering a freeze

on all prices and wages
throughout the United States.”

– [Announcer] In August of 1971,
in an attempt to control inflation,

President Richard Nixon simply
declared that

price increases
were now illegal.

Soon after Nixon's declaration,

the situation in many markets
started to look like this.

The market equilibrium price
was above the current price,

but it was illegal to raise prices.

Prices were hitting the ceiling,

the maximum price
allowed by law.

With a price ceiling,
buyers are unable

to signal their increased demand
by bidding prices up.

And suppliers in turn
have no incentive

to increase the quantity supplied
because they can't raise the price.

The result is a shortage, shortage.

The quantity demanded
exceeds the quantity supplied.

For example, in the 1970s,
price ceilings on gasoline meant

that it was common to have no gas
at the gas station.

However, the story
doesn't end there.

More people want to buy gasoline
than there was gasoline available.

So who gets the gasoline?

Rather than compete for gasoline
by bidding up the price,

buyers now competed by waiting
in longer and longer lines,

in effect bidding up their time.

In the '70s, people would wait
for hours

at the gas station to fill up.

So while the monetary price
of gasoline doesn't rise,

the price paid
in people's time did increase.

Moreover, when buyers pay for
gasoline with money,

the seller gets the money.

When buyers pay
for gasoline in time,

the seller doesn't get the time.

The time just gets wasted.

Do you recall
from the previous videos

how the price system
coordinates the actions

of thousands of people
all over the world

in order to deliver flowers?

Well, with price controls in place,
the economy became dis-coordinated.

Shortages of steel meant
that construction workers

had to be sent home

and new building construction delayed.

Factories and offices
had to close

when shortages meant
they couldn't operate.

And when they closed the firms
relying on them had to close too.

In perhaps the most ironic case,

a shortage of steel
drilling equipment

made it difficult to drill for oil
even as the United States

was undergoing the worst
energy crisis in its history.

And other odd
things started to happen.

In a market economy,
when it gets cold on the east coast

and the demand for
heating oil increases,

entrepreneurs ship oil
from where it has low value,

here in sunny California,
and ship it

to where it has high value
in cold New Hampshire.

Buy low, sell high.

With price controls in place,
high-value consumers of heating oil

couldn't bid up the price,

and so there was no incentive
for entrepreneurs to bring oil

to where it was in greatest demand.

As a result, in the harsh winter
of 1972 to 1973,

people were freezing on the east
coast even as people elsewhere

in the United States had enough
oil to heat their swimming pools.

And then, the chickens
started to drown.

A price ceiling had been imposed
on the price of chickens,

but not on the price of feed.

Farmers realized that
at the controlled price,

they would actually lose money
if they fed their chicks

to fatten them up and bring them
to the market.

So the farmers drowned
millions of baby chicks.

- [Chick] “Thanks, price controls.”

- [Announcer] The list of strange,
unintended consequences

like these go on and on.

In the next few videos,

we'll dive deeper
into price ceilings,

the five types of effects they cause,

and how to analyze these
using supply and demand.

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click "Practice Questions."

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