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- In this video, we are going to take
a look at another effect of price

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ceilings, wasteful lines and other
search costs. Let's get started.

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It's important to understand that price
controls do not eliminate competition.

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Competition for scarce goods is an ever
present force under all forms of social

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organization. What price controls do is
they change the form that competition

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takes. So in a market, demanders compete
by pushing prices up. Suppliers compete by

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pushing prices down. When we have price
controls that shifting of prices is no

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longer possible. The competition remains
it just takes other forms. Here's an

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example of musical chairs. The quantity
demanded exceeds the quantity supplied.

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There's a shortage. But there's still lots
of competition, lots of scrambling to get

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hold of those goods which are in short
supply. So lets take a closer look at some

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of the forms that competition takes when
we have price controls and shortages.

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So suppose there's a price control on
gasoline and oil making it illegal to

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compete for these goods by pushing the
price up. Now by the last there's other

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ways of competing. Some buyers might try
bribing the station owners. This is not

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necessarily the first thing which would
happen in the United States but in other

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places and countries this is extremely
common. Having a cousin who works in the

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factory which is producing the good which
is in shortage is extremely important.

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Using ones political connections. Being
part of the political elite which is

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extremely important in obtaining goods,
which is in shortage. Even in the United

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States remember that firms also need
oil and gasoline in

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order to operate. And in the
1970s when there was a

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shortage of oil, firms appealed to the
Department of Energy, lobbied their

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congressman and senator to obtain an
allocation of oil for their firm.

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For consumers, another way to obtain the
good is to be willing to wait in line.

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Now time waiting in line is also a cost.
So let's ask, "How long will the

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line get?" We can use our model to
understand willingness to wait in line

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and how long the lines will get.
Let's take a look.

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So here's our supply and demand diagram
of the shortage. Remember that at the

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controlled price we read the quantity
demanded off the demand curve QD and at

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the controlled price we read quantity off
the supply curve QS. So QS is the actual

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amount of gasoline supply given the
controlled price of one dollar. Now, here

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is the key question. How much are buyers
willing to pay for a gallon of gasoline?

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When QS is the amount which is being
supplied. How much are buyers willing to

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pay? The most they are willing to pay for
a gallon of gasoline well remember we can

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read that off the demand curve, that's
what the demand curve tells us. So at the

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controlled price when the quantity
supplied is QS buyers are willing to pay

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three dollars per gallon of gasoline. They
are only allowed to pay in money one

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dollar. So, if a buyer were to obtain a
gallon of gasoline at a controlled price

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of one dollar that's actually worth to
them three dollars. That explains why

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people are willing to wait in line for a
long time in order to get gasoline because

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the shortage reduced the quantity of
supply. It's raised the

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willingness to pay for gasoline

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but it hasn't raised the price of
gasoline. Therefore people are willing to

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wait in line a long time. And, in fact,
the line will grow until on the margin the

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time price plus the money price will be
equal to the willingness to pay. So the

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line will grow until the money price,
which is one dollar per gallon, plus the

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time price, the time wasted in line, which
will grow until it's two dollars a gallon

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until the total price equals the
willingness to pay. Why is that? Well,

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imagine if that were not the case. Imagine
that you could obtain a gallon of gasoline

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which is worth three dollars for you. And
you only had to pay a dollar plus 50 cents

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in waiting time. Well that would be a
great deal. So people will be willing to

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wait in line so long as the total price
the money price plus the time price is

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less than the willingness to pay. This
means that the line will continue to grow

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until the time price equals the
willingness to pay. SO, if we now take the

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time price, which is the difference in the
willingness to pay and the controlled

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price times the quantity that gives us the
total value of wasted time. So, another

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effect of price control it creates long
lines in order to compete to get the good

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instead of bidding the price up, they bid
in terms of willingness to wait in line.

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And those lines are wasteful. Creates a
lot of wasted time.

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Let's take a look with a numerical
example. Okay, here's a simple numerical

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example to bring this home. Suppose that
buyers value their time at ten dollars an

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hour. That the average fuel tank holds 20
gallons. Now imagine that a buyer arrives

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early at the gasoline station and that
they wait one hour.

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The total cost of the gasoline is then
$20. One dollar per gallon times 20

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gallons in money cost plus
ten dollars in time cost.

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They waited an hour
and that they value their time

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at ten dollars an hour. So the total
cost of the gasoline is then $30. It took

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$30 worth of time and money in order to
get 20 gallons. So the implied cost per

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gallon is $1.50 per gallon. However,
remember that given the quantity supplied

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given the shortage the value of gasoline
is three dollars per gallon. So this buyer

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managed to obtain something which is worth
three dollars a gallon for only a dollar

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fifty per gallon. That's a good deal so
other buyers are going to bid up the price

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by arriving earlier and earlier. And this
is going to push up the time cost. The

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money cost is fixed because of the price
control but the time cost can still

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increase. In fact, the line will lengthen
until the total cost of obtaining 20

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gallons of gasoline equals $60 or three
dollars per gallon. In other words, the

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buyers will end up spending $20 in money
cost plus $40 time cost or four hours of

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waiting. So we're able to calculate
approximately how long the line will get.

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It will get four hours worth of time. So
this again illustrates that competition

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does not go away when we have price
controls. Instead competition takes a

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different form and one of those forms is
instead of bidding up the money price the

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time price is bid up and we get long and
wasteful lines. So what we've just seen

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is in a free market buyers compete to
obtain goods by bidding up money

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prices. And when we have price controls
one way that buyers compete to obtain

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goods is by bidding up time prices by
being willing to wait in line. So what's a

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better form of competition? Bidding or
paying in money or paying in time? Does it

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make a difference? After all, some people
have more money, some people have more

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time, is it just a matter of preference.
No. It is much better to have an economic

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system where competition takes a form of
bidding in money than it takes a form of

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bidding in time. Why? Paying in time is
much more wasteful. When you bid in terms

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of money the money goes to the station
owner. Money does not disappear. That

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purchasing power is transferred from the
consumer to the producer. On the other

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hand, when buyers bid in terms of time,
when they wait in line, that waiting in

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line is just lost. It's not transferred to
the producer. When you wait in line for

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four hours to obtain gasoline the seller
of gasoline doesn't get to add four hours

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to his lifespan. So that waiting in line
is just a total loss. When you pay in

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money the purchasing power is transferred
to the station owner. When you pay in

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terms of time, the value of that time is
simply lost. It benefits no one.

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Okay quick reminder of where we are. Price
ceilings and five important effects. We've

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looked at shortages, reductions in product
quantity.We've just completed wasteful

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lines and other search costs. Up next, a
loss in gains from trade.

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And then a misallocation of resources.

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- If you want to test yourself, click
Practice Questions or if you're ready to

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move on just click Next Video.