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- [Alex] In this video, we're going
to take a look at another effect
of price ceilings: wasteful lines
and other search costs.
Let's get started.
It's important to understand
that price controls
do not eliminate competition.
Competition for scarce goods
is an ever present force
under all forms
of social organization.
What price controls do
is they change the form
that competition takes.
So in a market, demanders compete
by pushing prices up.
Suppliers compete
by pushing prices down.
When we have price controls,
that shifting of prices
is no longer possible.
But competition remains --
it just takes other forms.
Here's an example
of musical chairs.
The quantity demanded
exceeds the quantity supplied.
There's a shortage.
But there's still lots
of competition,
lots of scrambling
to get hold of those goods
which are in short supply.
So let's take a closer look
at some of the forms
that competition takes
when we have price controls
and shortages.
So suppose there's a price control
on gasoline and oil,
making it illegal to compete
for these goods
by pushing the price up.
Nevertheless, there are other ways
of competing.
Some buyers, for example,
might try bribing
the station owners.
This is not necessarily
the first thing which would happen
in the United States,
but in other places and countries
this is extremely common.
Having a cousin who works
in the factory
which is producing the good
which is in shortage
is extremely important.
Using one's political connections,
being part of the political elite
is extremely important
for obtaining goods,
which are in shortage.
Even in the United States,
remember that firms
also need oil and gasoline
in order to operate.
And in the 1970s when there
was a shortage of oil,
firms appealed
to the Department of Energy,
they lobbied their Congressman
and their Senator
to obtain an allocation of oil
for their firm.
For consumers, another way
to obtain the good
is to be willing to wait in line.
Now time waiting in line
is also a cost.
So let's ask,
"How long will the line get?"
We can use our model
to understand willingness
to wait in line and how long
the lines will get.
Let's take a look.
So here's our supply
and demand diagram
of the shortage.
Remember that
at the controlled price
we read the quantity demanded
off the demand curve, Qd,
and at the controlled price
we read quantity supplied
off the supply curve, Qs.
So Qs is the actual amount
of gasoline supplied
given the controlled price of $1.
Now, here is the key question:
How much are buyers willing
to pay for a gallon of gasoline,
when Qs is the amount
which is being supplied?
How much are buyers willing to pay?
What is the most they
are willing to pay for
gallon of gasoline?
Well remember, we can read that
off the demand curve --
that's what the demand
curve tells us.
So at the controlled price,
when the quantity supplied is Qs,
buyers are willing to pay $3
per gallon of gasoline.
They're only allowed
to pay in money $1.
So, if a buyer were to obtain
a gallon of gasoline
at a controlled price of $1,
that's actually worth to them $3.
That explains why people
are willing to wait in line
for a long time
in order to get gasoline,
because the shortage
has reduced the quantity supplied.
It's raised the willingness
to pay for gasoline,
but it hasn't raised
the price of gasoline.
Therefore people are willing
to wait in line.
And, in fact, the line will grow
until on the margin
the time price plus the money price
will be equal
to the willingness to pay.
So the line will grow
until the money price,
which is $1/gallon,
plus the time price,
the time wasted in line,
which will grow up
until it's $2/gallon,
until the total price
equals the willingness to pay.
Why is that?
Well, imagine that that
were not the case.
Imagine that you could obtain
a gallon of gasoline
which is worth $3 for you.
And you only had to pay a dollar
plus 50 cents in waiting time.
Well that would be a great deal.
So people will be willing
to wait in line
so long as the total price,
the money price
plus the time price, is less
than the willingness to pay.
This means that the line
will continue to grow
until the total price
is equal to the willingness to pay.
So, if we now take the time price,
which is the difference
between the willingness to pay
and the controlled price,
times the quantity --
that gives us the total value
of wasted time.
So, another effect
of price controls --
it creates long lines
in order to compete
to get the good
instead of bidding the price up,
they bid in terms of being willing
to wait in line.
And those lines are wasteful,
creates a lot of wasted time.
Let's take a look
with a numerical example.
Okay, here's a simple
numerical example
to bring this home.
Suppose that buyers
value their time at $10/hour,
and that the average fuel tank
holds 20 gallons.
Now imagine that a buyer
arrives early
at the gasoline station
and they wait one hour.
The total cost of the gasoline
is then $20,
$1/gallon times 20 gallons
in money cost,
plus $10 in time cost.
They waited an hour
and they value their time
at $10/hour.
So the total cost
of the gasoline is then $30.
It took $30 worth of time and money
in order to get 20 gallons.
So the implied cost per gallon
is $1.50/gallon.
However, remember
that given the quantity supplied,
given the shortage,
the value of gasoline
is $3/gallon.
So this buyer managed
to obtain something
which is worth $3/gallon
for only $1.50 per gallon.
That's a good deal so other buyers
are going to bid up the price
by arriving earlier and earlier.
And this is going to push up
the time cost.
The money cost is fixed
because of the price control,
but the time cost
can still increase.
In fact, the line will lengthen
until the total cost
of obtaining 20 gallons of gasoline
equals $60 or $3/gallon.
In other words, the buyers
will end up spending $20
in money cost
plus $40 in time cost,
or four hours of waiting.
So we're able to calculate
approximately how long
the line will get.
It will get four hours
worth of time.
So this again illustrates
that competition
does not go away
when we have price controls.
Instead competition
takes different forms,
and one of those forms is --
instead of bidding up
the money price,
the time price is bid up
and we get long and wasteful lines.
So what we've just seen
is that in a free market,
buyers compete to obtain goods
by bidding up money prices.
And when we have price controls,
one way that buyers compete
to obtain goods
is by bidding up time prices,
by being willing to wait in line.
So what's a better form
of competition?
Bidding or paying in money
or paying in time?
Does it make a difference?
After all, some people
have got more money,
some people have got more time,
is it just a matter of preference?
No. It is much better
to have an economic system
where competition takes the form
of bidding in money
than it takes the form
of bidding in time.
Why? Paying in time
is much more wasteful.
When you bid in terms of money,
the money goes
to the station owner.
The money does not disappear.
That purchasing power
is transferred from the consumer
to the producer.
On the other hand,
when buyers bid in terms of time,
when they wait in line,
that waiting in line is just lost.
It's not transferred
to the producer.
When you wait in line
for four hours
to obtain gasoline,
the seller of gasoline
doesn't get to add
four hours to his lifespan.
So that waiting in line
is just a total loss.
When you pay in money,
the purchasing power is transferred
to the station owner.
When you pay in terms of time,
the value of that time
is simply lost.
It benefits no one.
Okay, quick reminder
of where we are.
Price ceilings
have five important effects.
We've looked at shortages
and reductions in product quantity.
We've just completed wasteful lines
and other search costs.
Up next, a loss in gains
from trade,
and then a misallocation
of resources.
- [Narrator] If you want
to test yourself,
click "Practice Questions."
Or, if you're ready to move on,
just click "Next Video."
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