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Title: 
[Events]
Format: Layer, Start, End, Style, Name, MarginL, MarginR, MarginV, Effect, Text
Dialogue: 0,0:00:09.34,0:00:12.99,Default,,0000,0000,0000,,- [Alex] In this video, were going to take\Na look at another effect of price
Dialogue: 0,0:00:13.17,0:00:18.31,Default,,0000,0000,0000,,ceilings: wasteful lines and other\Nsearch costs. Let's get started.
Dialogue: 0,0:00:23.09,0:00:28.31,Default,,0000,0000,0000,,It's important to understand that price\Ncontrols do not eliminate competition.
Dialogue: 0,0:00:28.49,0:00:34.87,Default,,0000,0000,0000,,Competition for scarce goods is an ever\Npresent force under all forms of social
Dialogue: 0,0:00:35.05,0:00:39.96,Default,,0000,0000,0000,,organization. What price controls do is\Nthey change the form that competition
Dialogue: 0,0:00:40.14,0:00:47.66,Default,,0000,0000,0000,,takes. So in a market, demanders compete\Nby pushing prices up. Suppliers compete by
Dialogue: 0,0:00:47.84,0:00:53.61,Default,,0000,0000,0000,,pushing prices down. When we have price\Ncontrols, that shifting of prices is no
Dialogue: 0,0:00:53.79,0:00:58.55,Default,,0000,0000,0000,,longer possible. But competition remains -\Nit just takes other forms. Here's an
Dialogue: 0,0:00:58.73,0:01:05.19,Default,,0000,0000,0000,,example of musical chairs. The quantity\Ndemanded exceeds the quantity supplied.
Dialogue: 0,0:01:05.37,0:01:10.59,Default,,0000,0000,0000,,There's a shortage. But there's still lots\Nof competition, lots of scrambling to get
Dialogue: 0,0:01:10.77,0:01:16.47,Default,,0000,0000,0000,,hold of those goods which are in short\Nsupply. So lets take a closer look at some
Dialogue: 0,0:01:16.65,0:01:21.45,Default,,0000,0000,0000,,of the forms that competition takes when\Nwe have price controls and shortages.
Dialogue: 0,0:01:21.63,0:01:26.50,Default,,0000,0000,0000,,So suppose there's a price control on\Ngasoline and oil, making it illegal to
Dialogue: 0,0:01:26.68,0:01:30.77,Default,,0000,0000,0000,,compete for these goods by pushing the\Nprice up. Nevertheless, there are other
Dialogue: 0,0:01:30.95,0:01:36.05,Default,,0000,0000,0000,,ways of competing. Some buyers, for example, might \Ntry bribing the station owners. This is not
Dialogue: 0,0:01:36.23,0:01:39.77,Default,,0000,0000,0000,,necessarily the first thing which would\Nhappen in the United States, but in other
Dialogue: 0,0:01:39.95,0:01:44.32,Default,,0000,0000,0000,,places and countries this is extremely\Ncommon. Having a cousin who works in the
Dialogue: 0,0:01:44.50,0:01:48.64,Default,,0000,0000,0000,,factory which is producing the good which\Nis in shortage is extremely important.
Dialogue: 0,0:01:48.82,0:01:52.94,Default,,0000,0000,0000,,Using ones political connections, being\Npart of the political elite is
Dialogue: 0,0:01:53.12,0:01:57.40,Default,,0000,0000,0000,,extremely important for obtaining goods,\Nwhich are in shortage. Even in the United
Dialogue: 0,0:01:57.58,0:02:02.39,Default,,0000,0000,0000,,States, remember that firms also need\Noil and gasoline in
Dialogue: 0,0:02:02.39,0:02:05.34,Default,,0000,0000,0000,,order to operate. And in the\N1970s when there was a
Dialogue: 0,0:02:05.40,0:02:09.73,Default,,0000,0000,0000,,shortage of oil, firms appealed to the\NDepartment of Energy, they lobbied their
Dialogue: 0,0:02:09.91,0:02:14.21,Default,,0000,0000,0000,,Congressman and their Senator to obtain an\Nallocation of oil for their firm.
Dialogue: 0,0:02:15.17,0:02:20.65,Default,,0000,0000,0000,,For consumers, another way to obtain the\Ngood is to be willing to wait in line.
Dialogue: 0,0:02:21.57,0:02:27.06,Default,,0000,0000,0000,,Now time waiting in line is also a cost.\NSo let's ask, "How long will the
Dialogue: 0,0:02:27.06,0:02:32.12,Default,,0000,0000,0000,,line get?" We can use our model to\Nunderstand willingness to wait in line
Dialogue: 0,0:02:32.12,0:02:34.83,Default,,0000,0000,0000,,and how long the lines will get.\NLet's take a look.
Dialogue: 0,0:02:36.13,0:02:39.51,Default,,0000,0000,0000,,So here's our supply and demand diagram\Nof the shortage. Remember that at the
Dialogue: 0,0:02:39.69,0:02:44.52,Default,,0000,0000,0000,,controlled price we read the quantity\Ndemanded off the demand curve, Qd, and at
Dialogue: 0,0:02:44.70,0:02:51.18,Default,,0000,0000,0000,,the controlled price we read quantity supplied off\Nthe supply curve, Qs. So Qs is the actual
Dialogue: 0,0:02:51.36,0:02:56.76,Default,,0000,0000,0000,,amount of gasoline supplied given the\Ncontrolled price of one dollar. Now, here
Dialogue: 0,0:02:56.94,0:03:04.45,Default,,0000,0000,0000,,is the key question: How much are buyers\Nwilling to pay for a gallon of gasoline,
Dialogue: 0,0:03:04.63,0:03:10.58,Default,,0000,0000,0000,,when Qs is the amount which is being\Nsupplied? How much are buyers willing to
Dialogue: 0,0:03:10.76,0:03:14.70,Default,,0000,0000,0000,,pay? What is the most they are willing to pay for\Na gallon of gasoline? Well remember, we can
Dialogue: 0,0:03:14.88,0:03:19.49,Default,,0000,0000,0000,,read that off the demand curve - that's\Nwhat the demand curve tells us. So at the
Dialogue: 0,0:03:19.67,0:03:25.21,Default,,0000,0000,0000,,controlled price, when the quantity\Nsupplied is Qs, buyers are willing to pay
Dialogue: 0,0:03:25.39,0:03:31.28,Default,,0000,0000,0000,,$3 per gallon of gasoline. Theyre\Nonly allowed to pay in money $1.
Dialogue: 0,0:03:31.46,0:03:39.08,Default,,0000,0000,0000,,So, if a buyer were to obtain a\Ngallon of gasoline at a controlled price
Dialogue: 0,0:03:39.26,0:03:45.32,Default,,0000,0000,0000,,of $1, that's actually worth to\Nthem $3. That explains why
Dialogue: 0,0:03:45.50,0:03:52.08,Default,,0000,0000,0000,,people are willing to wait in line for a\Nlong time in order to get gasoline, because
Dialogue: 0,0:03:52.26,0:03:56.63,Default,,0000,0000,0000,,the shortage has reduced the quantity\Nsupplied. It's raised the
Dialogue: 0,0:03:56.63,0:03:58.45,Default,,0000,0000,0000,,willingness to pay for gasoline,
Dialogue: 0,0:03:58.45,0:04:04.00,Default,,0000,0000,0000,,but it hasn't raised the price of\Ngasoline. Therefore people are willing to
Dialogue: 0,0:04:04.18,0:04:11.60,Default,,0000,0000,0000,,wait in line. And, in fact, the line \Nwill grow until on the margin the
Dialogue: 0,0:04:11.78,0:04:19.33,Default,,0000,0000,0000,,time price plus the money price will be\Nequal to the willingness to pay. So the
Dialogue: 0,0:04:19.51,0:04:25.16,Default,,0000,0000,0000,,line will grow until the money price,\Nwhich is $1/gallon, plus the
Dialogue: 0,0:04:25.34,0:04:33.07,Default,,0000,0000,0000,,time price, the time wasted in line, which\Nwill grow up until it's $2/gallon,
Dialogue: 0,0:04:33.25,0:04:38.17,Default,,0000,0000,0000,,until the total price equals the\Nwillingness to pay. Why is that? Well,
Dialogue: 0,0:04:38.35,0:04:43.80,Default,,0000,0000,0000,,imagine that that were not the case. Imagine\Nthat you could obtain a gallon of gasoline
Dialogue: 0,0:04:43.98,0:04:49.16,Default,,0000,0000,0000,,which is worth $3 for you. And you \Nonly had to pay a dollar plus 50 cents
Dialogue: 0,0:04:49.34,0:04:53.96,Default,,0000,0000,0000,,in waiting time. Well that would be a\Ngreat deal. So people will be willing to
Dialogue: 0,0:04:54.14,0:05:01.09,Default,,0000,0000,0000,,wait in line so long as the total price,\Nthe money price plus the time price, is
Dialogue: 0,0:05:01.27,0:05:05.51,Default,,0000,0000,0000,,less than the willingness to pay. This\Nmeans that the line will continue to grow
Dialogue: 0,0:05:05.69,0:05:12.05,Default,,0000,0000,0000,,until the total price is equal to the\Nwillingness to pay. So, if we now take the
Dialogue: 0,0:05:12.23,0:05:17.59,Default,,0000,0000,0000,,time price, which is the difference between the\Nwillingness to pay and the controlled
Dialogue: 0,0:05:17.77,0:05:25.32,Default,,0000,0000,0000,,price, times the quantity - that gives us the\Ntotal value of wasted time. So, another
Dialogue: 0,0:05:25.50,0:05:31.47,Default,,0000,0000,0000,,effect of price controls - it creates long\Nlines in order to compete to get the good
Dialogue: 0,0:05:31.65,0:05:36.86,Default,,0000,0000,0000,,instead of bidding the price up, they bid\Nin terms of being willing to wait in line.
Dialogue: 0,0:05:37.04,0:05:41.29,Default,,0000,0000,0000,,And those lines are wasteful, creates a\Nlot of wasted time.
Dialogue: 0,0:05:42.53,0:05:46.41,Default,,0000,0000,0000,,Let's take a look with a numerical\Nexample. Okay, here's a simple numerical
Dialogue: 0,0:05:46.59,0:05:51.56,Default,,0000,0000,0000,,example to bring this home. Suppose that\Nbuyers value their time at $10/hour,
Dialogue: 0,0:05:51.74,0:05:56.92,Default,,0000,0000,0000,,and that the average fuel tank holds 20\Ngallons. Now imagine that a buyer arrives
Dialogue: 0,0:05:57.10,0:05:59.98,Default,,0000,0000,0000,,early at the gasoline station \Nand they wait one hour.
Dialogue: 0,0:06:00.16,0:06:06.62,Default,,0000,0000,0000,,The total cost of the gasoline \Nis then $20, $1/gallon times 20
Dialogue: 0,0:06:06.62,0:06:10.46,Default,,0000,0000,0000,,gallons in money cost, \Nplus $10 in time cost.
Dialogue: 0,0:06:10.46,0:06:13.62,Default,,0000,0000,0000,,They waited an hour\Nand they value their time
Dialogue: 0,0:06:13.62,0:06:19.23,Default,,0000,0000,0000,,at $10/hour. So the total cost of \Nthe gasoline is then $30. It took
Dialogue: 0,0:06:19.23,0:06:25.52,Default,,0000,0000,0000,,$30 worth of time and money in order to\Nget 20 gallons. So the implied cost per
Dialogue: 0,0:06:25.52,0:06:31.68,Default,,0000,0000,0000,,gallon is $1.50/gallon. However,\Nremember that given the quantity supplied,
Dialogue: 0,0:06:31.68,0:06:37.96,Default,,0000,0000,0000,,given the shortage, the value of \Ngasoline is $3/gallon. So this buyer
Dialogue: 0,0:06:37.96,0:06:42.95,Default,,0000,0000,0000,,managed to obtain something which \Nis worth $3/gallon for only $1.50
Dialogue: 0,0:06:42.95,0:06:50.11,Default,,0000,0000,0000,,per gallon. That's a good deal so other \Nbuyers are going to bid up the price
Dialogue: 0,0:06:50.11,0:06:56.33,Default,,0000,0000,0000,,by arriving earlier and earlier. And this\Nis going to push up the time cost. The
Dialogue: 0,0:06:56.33,0:07:00.70,Default,,0000,0000,0000,,money cost is fixed because of the price\Ncontrol, but the time cost can still
Dialogue: 0,0:07:00.70,0:07:08.53,Default,,0000,0000,0000,,increase. In fact, the line will lengthen\Nuntil the total cost of obtaining 20
Dialogue: 0,0:07:08.53,0:07:16.01,Default,,0000,0000,0000,,gallons of gasoline equals $60 or \N$3/gallon. In other words, the
Dialogue: 0,0:07:16.01,0:07:25.01,Default,,0000,0000,0000,,buyers will end up spending $20 in money\Ncost plus $40 in time cost, or four hours of
Dialogue: 0,0:07:25.01,0:07:29.58,Default,,0000,0000,0000,,waiting. So we're able to calculate\Napproximately how long the line will get.
Dialogue: 0,0:07:29.58,0:07:36.62,Default,,0000,0000,0000,,It will get four hours worth of time. So\Nthis again illustrates that competition
Dialogue: 0,0:07:36.62,0:07:42.60,Default,,0000,0000,0000,,does not go away when we have price\Ncontrols. Instead competition takes
Dialogue: 0,0:07:42.60,0:07:48.56,Default,,0000,0000,0000,,different forms, and one of those forms is -\Ninstead of bidding up the money price, the
Dialogue: 0,0:07:48.56,0:07:55.95,Default,,0000,0000,0000,,time price is bid up and we get long and\Nwasteful lines. So what we've just seen
Dialogue: 0,0:07:55.95,0:08:00.85,Default,,0000,0000,0000,,is that in a free market, buyers compete to\Nobtain goods by bidding up money
Dialogue: 0,0:08:00.85,0:08:06.54,Default,,0000,0000,0000,,prices. And when we have price controls,\None way that buyers compete to obtain
Dialogue: 0,0:08:06.54,0:08:12.03,Default,,0000,0000,0000,,goods is by bidding up time prices, by\Nbeing willing to wait in line. So what's a
Dialogue: 0,0:08:12.21,0:08:17.49,Default,,0000,0000,0000,,better form of competition? Bidding or\Npaying in money or paying in time? Does it
Dialogue: 0,0:08:17.67,0:08:20.91,Default,,0000,0000,0000,,make a difference? After all, some people\Nhave got more money, some people have got more
Dialogue: 0,0:08:21.09,0:08:27.40,Default,,0000,0000,0000,,time, is it just a matter of preference?\NNo. It is much better to have an economic
Dialogue: 0,0:08:27.58,0:08:33.31,Default,,0000,0000,0000,,system where competition takes the form of\Nbidding in money than it takes the form of
Dialogue: 0,0:08:33.49,0:08:42.73,Default,,0000,0000,0000,,bidding in time. Why? Paying in time is\Nmuch more wasteful. When you bid in terms
Dialogue: 0,0:08:42.91,0:08:48.88,Default,,0000,0000,0000,,of money, the money goes to the station\Nowner. The money does not disappear. That
Dialogue: 0,0:08:49.06,0:08:54.75,Default,,0000,0000,0000,,purchasing power is transferred from the\Nconsumer to the producer. On the other
Dialogue: 0,0:08:54.93,0:09:01.45,Default,,0000,0000,0000,,hand, when buyers bid in terms of time,\Nwhen they wait in line, that waiting in
Dialogue: 0,0:09:01.63,0:09:07.17,Default,,0000,0000,0000,,line is just lost. It's not transferred to\Nthe producer. When you wait in line for
Dialogue: 0,0:09:07.35,0:09:13.75,Default,,0000,0000,0000,,four hours to obtain gasoline, the seller\Nof gasoline doesn't get to add four hours
Dialogue: 0,0:09:13.93,0:09:20.24,Default,,0000,0000,0000,,to his lifespan. So that waiting in line\Nis just a total loss. When you pay in
Dialogue: 0,0:09:20.42,0:09:26.41,Default,,0000,0000,0000,,money, the purchasing power is transferred\Nto the station owner. When you pay in
Dialogue: 0,0:09:26.59,0:09:32.52,Default,,0000,0000,0000,,terms of time, the value of that time \Nis simply lost. It benefits no one.
Dialogue: 0,0:09:32.70,0:09:37.59,Default,,0000,0000,0000,,Okay, quick reminder of where we are. Price\Nceilings have five important effects. We've
Dialogue: 0,0:09:37.77,0:09:42.47,Default,,0000,0000,0000,,looked at shortages and reductions in product\Nquantity. We've just completed wasteful
Dialogue: 0,0:09:42.65,0:09:46.44,Default,,0000,0000,0000,,lines and other search costs. Up next, \Na loss in gains from trade,
Dialogue: 0,0:09:46.44,0:09:48.84,Default,,0000,0000,0000,,and then a misallocation of resources.
Dialogue: 0,0:09:50.17,0:09:54.68,Default,,0000,0000,0000,,- [Announcer] If you want to test yourself, click\NPractice Questions. Or, if you're ready to
Dialogue: 0,0:09:54.86,0:09:57.02,Default,,0000,0000,0000,,move on, just click Next Video.