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- [Alex] In this video, we're going[br]to take a look at another effect

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of price ceilings: wasteful lines[br]and other search costs.

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Let's get started.

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It's important to understand[br]that price controls

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do not eliminate competition.

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Competition for scarce goods[br]is an ever present force

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under all forms[br]of social organization.

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What price controls do[br]is they change the form

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that competition takes.

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So in a market, demanders compete[br]by pushing prices up.

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Suppliers compete[br]by pushing prices down.

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When we have price controls,[br]that shifting of prices

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is no longer possible.

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But competition remains --[br]it just takes other forms.

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Here's an example[br]of musical chairs.

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The quantity demanded[br]exceeds the quantity supplied.

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There's a shortage.

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But there's still lots[br]of competition,

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lots of scrambling[br]to get hold of those goods

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which are in short supply.

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So let's take a closer look[br]at some of the forms

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that competition takes[br]when we have price controls

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and shortages.

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So suppose there's a price control[br]on gasoline and oil,

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making it illegal to compete[br]for these goods

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by pushing the price up.

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Nevertheless, there are other ways[br]of competing.

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Some buyers, for example,[br]might try bribing

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the station owners.

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This is not necessarily[br]the first thing which would happen

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in the United States,[br]but in other places and countries

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this is extremely common.

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Having a cousin who works[br]in the factory

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which is producing the good[br]which is in shortage

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is extremely important.

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Using one's political connections,[br]being part of the political elite

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is extremely important[br]for obtaining goods,

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which are in shortage.

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Even in the United States,[br]remember that firms

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also need oil and gasoline[br]in order to operate.

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And in the 1970s when there[br]was a shortage of oil,

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firms appealed[br]to the Department of Energy,

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they lobbied their Congressman[br]and their Senator

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to obtain an allocation of oil[br]for their firm.

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For consumers, another way[br]to obtain the good

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is to be willing to wait in line.

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Now time waiting in line[br]is also a cost.

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So let's ask,[br]"How long will the line get?"

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We can use our model[br]to understand willingness

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to wait in line and how long[br]the lines will get.

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Let's take a look.

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So here's our supply[br]and demand diagram

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of the shortage.

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Remember that[br]at the controlled price

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we read the quantity demanded[br]off the demand curve, Qd,

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and at the controlled price[br]we read quantity supplied

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off the supply curve, Qs.

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So Qs is the actual amount[br]of gasoline supplied

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given the controlled price of $1.

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Now, here is the key question:[br]How much are buyers willing

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to pay for a gallon of gasoline,[br]when Qs is the amount

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which is being supplied?

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How much are buyers willing to pay?

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What is the most they[br]are willing to pay for

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gallon of gasoline?

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Well remember, we can read that[br]off the demand curve --

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that's what the demand[br]curve tells us.

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So at the controlled price,[br]when the quantity supplied is Qs,

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buyers are willing to pay $3[br]per gallon of gasoline.

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They're only allowed[br]to pay in money $1.

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So, if a buyer were to obtain[br]a gallon of gasoline

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at a controlled price of $1,[br]that's actually worth to them $3.

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That explains why people[br]are willing to wait in line

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for a long time[br]in order to get gasoline,

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because the shortage[br]has reduced the quantity supplied.

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It's raised the willingness[br]to pay for gasoline,

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but it hasn't raised[br]the price of gasoline.

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Therefore people are willing[br]to wait in line.

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And, in fact, the line will grow[br]until on the margin

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the time price plus the money price[br]will be equal

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to the willingness to pay.

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So the line will grow[br]until the money price,

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which is $1/gallon,[br]plus the time price,

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the time wasted in line,[br]which will grow up

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until it's $2/gallon,[br]until the total price

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equals the willingness to pay.

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Why is that?

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Well, imagine that that[br]were not the case.

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Imagine that you could obtain[br]a gallon of gasoline

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which is worth $3 for you.

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And you only had to pay a dollar[br]plus 50 cents in waiting time.

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Well that would be a great deal.

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So people will be willing[br]to wait in line

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so long as the total price,[br]the money price

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plus the time price, is less[br]than the willingness to pay.

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This means that the line[br]will continue to grow

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until the total price[br]is equal to the willingness to pay.

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So, if we now take the time price,[br]which is the difference

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between the willingness to pay[br]and the controlled price,

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times the quantity --[br]that gives us the total value

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of wasted time.

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So, another effect[br]of price controls --

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it creates long lines[br]in order to compete

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to get the good[br]instead of bidding the price up,

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they bid in terms of being willing[br]to wait in line.

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And those lines are wasteful,[br]creates a lot of wasted time.

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Let's take a look[br]with a numerical example.

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Okay, here's a simple[br]numerical example

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to bring this home.

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Suppose that buyers[br]value their time at $10/hour,

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and that the average fuel tank[br]holds 20 gallons.

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Now imagine that a buyer[br]arrives early

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at the gasoline station[br]and they wait one hour.

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The total cost of the gasoline [br]is then $20,

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$1/gallon times 20 gallons[br]in money cost,

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plus $10 in time cost.

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They waited an hour[br]and they value their time

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at $10/hour.

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So the total cost[br]of the gasoline is then $30.

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It took $30 worth of time and money[br]in order to get 20 gallons.

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So the implied cost per gallon[br]is $1.50/gallon.

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However, remember[br]that given the quantity supplied,

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given the shortage,[br]the value of gasoline

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is $3/gallon.

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So this buyer managed[br]to obtain something

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which is worth $3/gallon[br]for only $1.50 per gallon.

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That's a good deal so other buyers[br]are going to bid up the price

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by arriving earlier and earlier.

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And this is going to push up[br]the time cost.

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The money cost is fixed[br]because of the price control,

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but the time cost[br]can still increase.

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In fact, the line will lengthen[br]until the total cost

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of obtaining 20 gallons of gasoline[br]equals $60 or $3/gallon.

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In other words, the buyers[br]will end up spending $20

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in money cost[br]plus $40 in time cost,

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or four hours of waiting.

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So we're able to calculate[br]approximately how long

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the line will get.

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It will get four hours[br]worth of time.

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So this again illustrates[br]that competition

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does not go away[br]when we have price controls.

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Instead competition[br]takes different forms,

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and one of those forms is --[br]instead of bidding up

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the money price,[br]the time price is bid up

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and we get long and wasteful lines.

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So what we've just seen[br]is that in a free market,

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buyers compete to obtain goods[br]by bidding up money prices.

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And when we have price controls,[br]one way that buyers compete

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to obtain goods[br]is by bidding up time prices,

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by being willing to wait in line.

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So what's a better form[br]of competition?

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Bidding or paying in money[br]or paying in time?

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Does it make a difference?

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After all, some people[br]have got more money,

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some people have got more time,[br]is it just a matter of preference?

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No. It is much better[br]to have an economic system

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where competition takes the form[br]of bidding in money

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than it takes the form[br]of bidding in time.

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Why? Paying in time[br]is much more wasteful.

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When you bid in terms of money,[br]the money goes

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to the station owner.

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The money does not disappear.

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That purchasing power[br]is transferred from the consumer

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to the producer.

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On the other hand,[br]when buyers bid in terms of time,

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when they wait in line,[br]that waiting in line is just lost.

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It's not transferred[br]to the producer.

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When you wait in line[br]for four hours

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to obtain gasoline,[br]the seller of gasoline

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doesn't get to add[br]four hours to his lifespan.

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So that waiting in line[br]is just a total loss.

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When you pay in money,[br]the purchasing power is transferred

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to the station owner.

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When you pay in terms of time,[br]the value of that time

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is simply lost.

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It benefits no one.

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Okay, quick reminder[br]of where we are.

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Price ceilings[br]have five important effects.

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We've looked at shortages[br]and reductions in product quantity.

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We've just completed wasteful lines[br]and other search costs.

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Up next, a loss in gains[br]from trade,

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and then a misallocation[br]of resources.

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- [Narrator] If you want[br]to test yourself,

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click "Practice Questions."

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Or, if you're ready to move on,[br]just click "Next Video."

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