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♪ [music] ♪

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

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of price ceilings: wasteful lines
and other search costs.

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Let's get started.

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It's important to understand
that price controls

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do not eliminate competition.

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Competition for scarce goods
is an ever present force

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under all forms
of social organization.

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What price controls do
is they change the form

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that competition takes.

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

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Suppliers compete
by pushing prices down.

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When we have price controls,
that shifting of prices

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is no longer possible.

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But competition remains --
it just takes other forms.

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Here's an example
of musical chairs.

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The quantity demanded
exceeds the quantity supplied.

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There's a shortage.

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But there's still lots
of competition,

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lots of scrambling
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
at some of the forms

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that competition takes
when we have price controls

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and shortages.

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

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making it illegal to compete
for these goods

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by pushing the price up.

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Nevertheless, there are other ways
of competing.

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Some buyers, for example,
might try bribing

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the station owners.

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This is not necessarily
the first thing which would happen

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in the United States,
but in other places and countries

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this is extremely common.

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Having a cousin who works
in the factory

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which is producing the good
which is in shortage

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is extremely important.

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

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is extremely important
for obtaining goods,

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which are in shortage.

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Even in the United States,
remember that firms

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also need oil and gasoline
in order to operate.

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

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firms appealed
to the Department of Energy,

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they lobbied their Congressman
and their Senator

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to obtain an allocation of oil
for their firm.

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For consumers, another way
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
is also a cost.

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

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We can use our model
to understand willingness

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

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Let's take a look.

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So here's our supply
and demand diagram

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of the shortage.

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Remember that
at the controlled price

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we read the quantity demanded
off the demand curve, Qd,

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and at the controlled price
we read quantity supplied

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off the supply curve, Qs.

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So Qs is the actual amount
of gasoline supplied

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given the controlled price of $1.

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

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to pay for a gallon of gasoline,
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
are willing to pay for

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gallon of gasoline?

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

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that's what the demand
curve tells us.

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So at the controlled price,
when the quantity supplied is Qs,

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

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

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So, if a buyer were to obtain
a gallon of gasoline

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

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That explains why people
are willing to wait in line

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for a long time
in order to get gasoline,

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because the shortage
has reduced the quantity supplied.

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It's raised the willingness
to pay for gasoline,

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but it hasn't raised
the price of gasoline.

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Therefore people are willing
to wait in line.

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And, in fact, the line will grow
until on the margin

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the time price plus the money price
will be equal

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to the willingness to pay.

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So the line will grow
until the money price,

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which is $1/gallon,
plus the time price,

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the time wasted in line,
which will grow up

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until it's $2/gallon,
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
were not the case.

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Imagine that you could obtain
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
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
to wait in line

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so long as the total price,
the money price

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

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This means that the line
will continue to grow

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until the total price
is equal to the willingness to pay.

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

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between the willingness to pay
and the controlled price,

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times the quantity --
that gives us the total value

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of wasted time.

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So, another effect
of price controls --

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it creates long lines
in order to compete

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to get the good
instead of bidding the price up,

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they bid in terms of being willing
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.

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Okay, here's a simple
numerical example

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to bring this home.

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

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and that the average fuel tank
holds 20 gallons.

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Now imagine that a buyer
arrives early

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at the gasoline station
and they wait one hour.

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The total cost of the gasoline 
is then $20,

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$1/gallon times 20 gallons
in money cost,

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plus $10 in time cost.

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They waited an hour
and they value their time

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at $10/hour.

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So the total cost
of the gasoline is then $30.

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

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So the implied cost per gallon
is $1.50/gallon.

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However, remember
that given the quantity supplied,

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given the shortage,
the value of gasoline

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is $3/gallon.

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So this buyer managed
to obtain something

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

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That's a good deal so other buyers
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
the time cost.

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The money cost is fixed
because of the price control,

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but the time cost
can still increase.

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In fact, the line will lengthen
until the total cost

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

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

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in money cost
plus $40 in time cost,

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or four hours of waiting.

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So we're able to calculate
approximately how long

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the line will get.

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It will get four hours
worth of time.

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So this again illustrates
that competition

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does not go away
when we have price controls.

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Instead competition
takes different forms,

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and one of those forms is --
instead of bidding up

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the money price,
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
is that in a free market,

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buyers compete to obtain goods
by bidding up money prices.

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

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to obtain goods
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
of competition?

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Bidding or paying in money
or paying in time?

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Does it make a difference?

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After all, some people
have got more money,

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

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No. It is much better
to have an economic system

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where competition takes the form
of bidding in money

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than it takes the form
of bidding in time.

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Why? Paying in time
is much more wasteful.

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When you bid in terms of money,
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
is transferred from the consumer

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to the producer.

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

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

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It's not transferred
to the producer.

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When you wait in line
for four hours

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to obtain gasoline,
the seller of gasoline

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doesn't get to add
four hours to his lifespan.

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So that waiting in line
is just a total loss.

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When you pay in money,
the purchasing power is transferred

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to the station owner.

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When you pay in terms of time,
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
of where we are.

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Price ceilings
have five important effects.

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

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

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Up next, a loss in gains
from trade,

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and then a misallocation
of resources.

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- [Narrator] If you want
to test yourself,

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click "Practice Questions."

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

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♪ [music] ♪