0:00:09.342,0:00:12.990 - [Alex] In this video, were going to take[br]a look at another effect of price 0:00:13.170,0:00:18.312 ceilings: wasteful lines and other[br]search costs. Let's get started. 0:00:23.090,0:00:28.310 It's important to understand that price[br]controls do not eliminate competition. 0:00:28.490,0:00:34.870 Competition for scarce goods is an ever[br]present force under all forms of social 0:00:35.050,0:00:39.960 organization. What price controls do is[br]they change the form that competition 0:00:40.140,0:00:47.660 takes. So in a market, demanders compete[br]by pushing prices up. Suppliers compete by 0:00:47.840,0:00:53.610 pushing prices down. When we have price[br]controls, that shifting of prices is no 0:00:53.790,0:00:58.550 longer possible. But competition remains -[br]it just takes other forms. Here's an 0:00:58.730,0:01:05.190 example of musical chairs. The quantity[br]demanded exceeds the quantity supplied. 0:01:05.370,0:01:10.590 There's a shortage. But there's still lots[br]of competition, lots of scrambling to get 0:01:10.770,0:01:16.470 hold of those goods which are in short[br]supply. So lets take a closer look at some 0:01:16.650,0:01:21.450 of the forms that competition takes when[br]we have price controls and shortages. 0:01:21.630,0:01:26.500 So suppose there's a price control on[br]gasoline and oil, making it illegal to 0:01:26.680,0:01:30.770 compete for these goods by pushing the[br]price up. Nevertheless, there are other 0:01:30.950,0:01:36.050 ways of competing. Some buyers, for example, might [br]try bribing the station owners. This is not 0:01:36.230,0:01:39.770 necessarily the first thing which would[br]happen in the United States, but in other 0:01:39.950,0:01:44.320 places and countries this is extremely[br]common. Having a cousin who works in the 0:01:44.500,0:01:48.640 factory which is producing the good which[br]is in shortage is extremely important. 0:01:48.820,0:01:52.940 Using ones political connections, being[br]part of the political elite is 0:01:53.120,0:01:57.400 extremely important for obtaining goods,[br]which are in shortage. Even in the United 0:01:57.580,0:02:02.387 States, remember that firms also need[br]oil and gasoline in 0:02:02.387,0:02:05.338 order to operate. And in the[br]1970s when there was a 0:02:05.400,0:02:09.729 shortage of oil, firms appealed to the[br]Department of Energy, they lobbied their 0:02:09.910,0:02:14.213 Congressman and their Senator to obtain an[br]allocation of oil for their firm. 0:02:15.173,0:02:20.649 For consumers, another way to obtain the[br]good is to be willing to wait in line. 0:02:21.566,0:02:27.065 Now time waiting in line is also a cost.[br]So let's ask, "How long will the 0:02:27.065,0:02:32.119 line get?" We can use our model to[br]understand willingness to wait in line 0:02:32.119,0:02:34.826 and how long the lines will get.[br]Let's take a look. 0:02:36.128,0:02:39.510 So here's our supply and demand diagram[br]of the shortage. Remember that at the 0:02:39.690,0:02:44.520 controlled price we read the quantity[br]demanded off the demand curve, Qd, and at 0:02:44.700,0:02:51.180 the controlled price we read quantity supplied off[br]the supply curve, Qs. So Qs is the actual 0:02:51.360,0:02:56.760 amount of gasoline supplied given the[br]controlled price of one dollar. Now, here 0:02:56.940,0:03:04.450 is the key question: How much are buyers[br]willing to pay for a gallon of gasoline, 0:03:04.630,0:03:10.580 when Qs is the amount which is being[br]supplied? How much are buyers willing to 0:03:10.760,0:03:14.700 pay? What is the most they are willing to pay for[br]a gallon of gasoline? Well remember, we can 0:03:14.880,0:03:19.490 read that off the demand curve - that's[br]what the demand curve tells us. So at the 0:03:19.670,0:03:25.210 controlled price, when the quantity[br]supplied is Qs, buyers are willing to pay 0:03:25.390,0:03:31.280 $3 per gallon of gasoline. Theyre[br]only allowed to pay in money $1. 0:03:31.460,0:03:39.080 So, if a buyer were to obtain a[br]gallon of gasoline at a controlled price 0:03:39.260,0:03:45.320 of $1, that's actually worth to[br]them $3. That explains why 0:03:45.500,0:03:52.080 people are willing to wait in line for a[br]long time in order to get gasoline, because 0:03:52.260,0:03:56.633 the shortage has reduced the quantity[br]supplied. It's raised the 0:03:56.633,0:03:58.454 willingness to pay for gasoline, 0:03:58.454,0:04:04.000 but it hasn't raised the price of[br]gasoline. Therefore people are willing to 0:04:04.180,0:04:11.600 wait in line. And, in fact, the line [br]will grow until on the margin the 0:04:11.780,0:04:19.329 time price plus the money price will be[br]equal to the willingness to pay. So the 0:04:19.510,0:04:25.160 line will grow until the money price,[br]which is $1/gallon, plus the 0:04:25.340,0:04:33.070 time price, the time wasted in line, which[br]will grow up until it's $2/gallon, 0:04:33.250,0:04:38.170 until the total price equals the[br]willingness to pay. Why is that? Well, 0:04:38.350,0:04:43.800 imagine that that were not the case. Imagine[br]that you could obtain a gallon of gasoline 0:04:43.980,0:04:49.160 which is worth $3 for you. And you [br]only had to pay a dollar plus 50 cents 0:04:49.340,0:04:53.960 in waiting time. Well that would be a[br]great deal. So people will be willing to 0:04:54.140,0:05:01.090 wait in line so long as the total price,[br]the money price plus the time price, is 0:05:01.270,0:05:05.510 less than the willingness to pay. This[br]means that the line will continue to grow 0:05:05.690,0:05:12.050 until the total price is equal to the[br]willingness to pay. So, if we now take the 0:05:12.230,0:05:17.590 time price, which is the difference between the[br]willingness to pay and the controlled 0:05:17.770,0:05:25.320 price, times the quantity - that gives us the[br]total value of wasted time. So, another 0:05:25.500,0:05:31.470 effect of price controls - it creates long[br]lines in order to compete to get the good 0:05:31.650,0:05:36.860 instead of bidding the price up, they bid[br]in terms of being willing to wait in line. 0:05:37.040,0:05:41.290 And those lines are wasteful, creates a[br]lot of wasted time. 0:05:42.529,0:05:46.410 Let's take a look with a numerical[br]example. Okay, here's a simple numerical 0:05:46.590,0:05:51.560 example to bring this home. Suppose that[br]buyers value their time at $10/hour, 0:05:51.740,0:05:56.920 and that the average fuel tank holds 20[br]gallons. Now imagine that a buyer arrives 0:05:57.100,0:05:59.980 early at the gasoline station [br]and they wait one hour. 0:06:00.160,0:06:06.615 The total cost of the gasoline [br]is then $20, $1/gallon times 20 0:06:06.615,0:06:10.462 gallons in money cost, [br]plus $10 in time cost. 0:06:10.462,0:06:13.622 They waited an hour[br]and they value their time 0:06:13.622,0:06:19.232 at $10/hour. So the total cost of [br]the gasoline is then $30. It took 0:06:19.232,0:06:25.516 $30 worth of time and money in order to[br]get 20 gallons. So the implied cost per 0:06:25.516,0:06:31.678 gallon is $1.50/gallon. However,[br]remember that given the quantity supplied, 0:06:31.678,0:06:37.963 given the shortage, the value of [br]gasoline is $3/gallon. So this buyer 0:06:37.963,0:06:42.950 managed to obtain something which [br]is worth $3/gallon for only $1.50 0:06:42.950,0:06:50.114 per gallon. That's a good deal so other [br]buyers are going to bid up the price 0:06:50.114,0:06:56.334 by arriving earlier and earlier. And this[br]is going to push up the time cost. The 0:06:56.334,0:07:00.702 money cost is fixed because of the price[br]control, but the time cost can still 0:07:00.702,0:07:08.531 increase. In fact, the line will lengthen[br]until the total cost of obtaining 20 0:07:08.531,0:07:16.013 gallons of gasoline equals $60 or [br]$3/gallon. In other words, the 0:07:16.013,0:07:25.014 buyers will end up spending $20 in money[br]cost plus $40 in time cost, or four hours of 0:07:25.014,0:07:29.585 waiting. So we're able to calculate[br]approximately how long the line will get. 0:07:29.585,0:07:36.617 It will get four hours worth of time. So[br]this again illustrates that competition 0:07:36.617,0:07:42.599 does not go away when we have price[br]controls. Instead competition takes 0:07:42.599,0:07:48.556 different forms, and one of those forms is -[br]instead of bidding up the money price, the 0:07:48.556,0:07:55.948 time price is bid up and we get long and[br]wasteful lines. So what we've just seen 0:07:55.948,0:08:00.848 is that in a free market, buyers compete to[br]obtain goods by bidding up money 0:08:00.848,0:08:06.543 prices. And when we have price controls,[br]one way that buyers compete to obtain 0:08:06.543,0:08:12.030 goods is by bidding up time prices, by[br]being willing to wait in line. So what's a 0:08:12.210,0:08:17.490 better form of competition? Bidding or[br]paying in money or paying in time? Does it 0:08:17.670,0:08:20.910 make a difference? After all, some people[br]have got more money, some people have got more 0:08:21.090,0:08:27.400 time, is it just a matter of preference?[br]No. It is much better to have an economic 0:08:27.580,0:08:33.308 system where competition takes the form of[br]bidding in money than it takes the form of 0:08:33.490,0:08:42.730 bidding in time. Why? Paying in time is[br]much more wasteful. When you bid in terms 0:08:42.909,0:08:48.880 of money, the money goes to the station[br]owner. The money does not disappear. That 0:08:49.060,0:08:54.750 purchasing power is transferred from the[br]consumer to the producer. On the other 0:08:54.930,0:09:01.450 hand, when buyers bid in terms of time,[br]when they wait in line, that waiting in 0:09:01.630,0:09:07.170 line is just lost. It's not transferred to[br]the producer. When you wait in line for 0:09:07.350,0:09:13.750 four hours to obtain gasoline, the seller[br]of gasoline doesn't get to add four hours 0:09:13.930,0:09:20.240 to his lifespan. So that waiting in line[br]is just a total loss. When you pay in 0:09:20.420,0:09:26.410 money, the purchasing power is transferred[br]to the station owner. When you pay in 0:09:26.590,0:09:32.520 terms of time, the value of that time [br]is simply lost. It benefits no one. 0:09:32.700,0:09:37.590 Okay, quick reminder of where we are. Price[br]ceilings have five important effects. We've 0:09:37.770,0:09:42.470 looked at shortages and reductions in product[br]quantity. We've just completed wasteful 0:09:42.650,0:09:46.443 lines and other search costs. Up next, [br]a loss in gains from trade, 0:09:46.443,0:09:48.837 and then a misallocation of resources. 0:09:50.170,0:09:54.680 - [Announcer] If you want to test yourself, click[br]Practice Questions. Or, if you're ready to 0:09:54.860,0:09:57.025 move on, just click Next Video.