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- [President Nixon] “I am today ordering a freeze [br]on all prices and wages throughout the United

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States.” – [Announcer] In August of 1971, in an [br]attempt to control inflation, President Richard

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Nixon simply declared that price increases[br]were now illegal. Soon after Nixon's

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declaration, the situation in many markets[br]started to look like this. The market

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equilibrium price was above the current[br]price, but it was illegal to raise prices.

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Prices were hitting the ceiling, the[br]maximum price allowed by law.

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With a price ceiling, buyers are[br]unable to signal their increased

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demand by bidding prices up. And suppliers[br]in turn have no incentive to increase the

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quantity supplied because they[br]can't raise the price. The result

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is a shortage, shortage. The quantity[br]demanded exceeds the quantity supplied.

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For example, in the 1970s, price ceilings[br]on gasoline meant that it was common to

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have no gas at the gas station. However,[br]the story doesn't end there. More people

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want to buy gasoline than there was[br]gasoline available. So who gets the

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gasoline? Rather than compete for gasoline[br]by bidding up the price, buyers now

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competed by waiting in longer and longer[br]lines, in effect bidding up their time.

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In the '70s, people would wait for hours[br]at the gas station to fill up. So while

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the monetary price of gasoline doesn't[br]rise, the price paid in people's time did

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increase. Moreover, when buyers pay for[br]gasoline with money, the seller gets the

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money. When buyers pay for gasoline in[br]time, the seller doesn't get the time.

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The time just gets wasted.

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Do you recall from the previous videos how[br]the price system coordinates the actions

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of thousands of people all over the world[br]in order to deliver flowers? Well, with

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price controls in place, the economy became[br]dis-coordinated. Shortages of steel meant

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that construction workers[br]had to be sent home

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and new building[br]construction delayed.

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Factories and offices had to close when[br]shortages meant they couldn't operate. And

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when they closed the firms relying on them[br]had to close too. In perhaps the most

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ironic case, a shortage of steel drilling[br]equipment made it difficult to drill for

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oil even as the United States was[br]undergoing the worst energy crisis in its

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history. And other odd[br]things started to happen.

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In a market economy, when it gets cold on[br]the east coast and the demand for heating

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oil increases, entrepreneurs ship oil from[br]where it has low value, here in sunny

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California, and ship it to where it has[br]high value in cold New Hampshire. Buy

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low, sell high. With price controls in[br]place, high-value consumers of heating oil

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couldn't bid up the price, and so there was[br]no incentive for entrepreneurs to bring

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oil to where it was in greatest demand. As[br]a result, in the harsh winter of 1972 to

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1973, people were freezing on the east[br]coast even as people elsewhere in the

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United States had enough[br]oil to heat their swimming pools.

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And then, the chickens started to drown. A[br]price ceiling had been imposed on the

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price of chickens, but not on the price of[br]feed. Farmers realized that at the

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controlled price, they would actually lose[br]money if they fed their chicks to fatten

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them up and bring them to the market. So[br]the farmers drowned millions of baby

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chicks.[br]- [Chick] “Thanks, price controls.”

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- [Announcer] The list of strange, unintended[br]consequences like these go on and on. In

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the next few videos, we'll dive deeper[br]into price ceilings, the five types of

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effects they cause, and how to analyze[br]these using supply and demand.

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If you want to test yourself, click[br]"Practice Questions." Or, if you're ready to

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move on just click "Next Video."

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