Price Ceilings: Lines and Search Costs
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Not Synced♪ [music] ♪
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Not Synced- [Alex] In this video, we're going
to take a look at another effect -
Not Syncedof price ceilings: wasteful lines
and other search costs. -
Not SyncedLet's get started.
-
Not SyncedIt's important to understand
that price controls -
Not Synceddo not eliminate competition.
-
Not SyncedCompetition for scarce goods
is an ever present force -
Not Syncedunder all forms
of social organization. -
Not SyncedWhat price controls do
is they change the form -
Not Syncedthat competition takes.
-
Not SyncedSo in a market, demanders compete
by pushing prices up. -
Not SyncedSuppliers compete
by pushing prices down. -
Not SyncedWhen we have price controls,
that shifting of prices -
Not Syncedis no longer possible.
-
Not SyncedBut competition remains --
it just takes other forms. -
Not SyncedHere's an example
of musical chairs. -
Not SyncedThe quantity demanded
exceeds the quantity supplied. -
Not SyncedThere's a shortage.
-
Not SyncedBut there's still lots
of competition, -
Not Syncedlots of scrambling
to get hold of those goods -
Not Syncedwhich are in short supply.
-
Not SyncedSo let's take a closer look
at some of the forms -
Not Syncedthat competition takes
when we have price controls -
Not Syncedand shortages.
-
Not SyncedSo suppose there's a price control
on gasoline and oil, -
Not Syncedmaking it illegal to compete
for these goods -
Not Syncedby pushing the price up.
-
Not SyncedNevertheless, there are other ways
of competing. -
Not SyncedSome buyers, for example,
might try bribing -
Not Syncedthe station owners.
-
Not SyncedThis is not necessarily
the first thing which would happen -
Not Syncedin the United States,
but in other places and countries -
Not Syncedthis is extremely common.
-
Not SyncedHaving a cousin who works
in the factory -
Not Syncedwhich is producing the good
which is in shortage -
Not Syncedis extremely important.
-
Not SyncedUsing one's political connections,
being part of the political elite -
Not Syncedis extremely important
for obtaining goods, -
Not Syncedwhich are in shortage.
-
Not SyncedEven in the United States,
remember that firms -
Not Syncedalso need oil and gasoline
in order to operate. -
Not SyncedAnd in the 1970s when there
was a shortage of oil, -
Not Syncedfirms appealed
to the Department of Energy, -
Not Syncedthey lobbied their Congressman
and their Senator -
Not Syncedto obtain an allocation of oil
for their firm. -
Not SyncedFor consumers, another way
to obtain the good -
Not Syncedis to be willing to wait in line.
-
Not SyncedNow time waiting in line
is also a cost. -
Not SyncedSo let's ask,
"How long will the line get?" -
Not SyncedWe can use our model
to understand willingness -
Not Syncedto wait in line and how long
the lines will get. -
Not SyncedLet's take a look.
-
Not SyncedSo here's our supply
and demand diagram -
Not Syncedof the shortage.
-
Not SyncedRemember that
at the controlled price -
Not Syncedwe read the quantity demanded
off the demand curve, Qd, -
Not Syncedand at the controlled price
we read quantity supplied -
Not Syncedoff the supply curve, Qs.
-
Not SyncedSo Qs is the actual amount
of gasoline supplied -
Not Syncedgiven the controlled price of $1.
-
Not SyncedNow, here is the key question:
How much are buyers willing -
Not Syncedto pay for a gallon of gasoline,
when Qs is the amount -
Not Syncedwhich is being supplied?
-
Not SyncedHow much are buyers willing to pay?
-
Not SyncedWhat is the most they
are willing to pay for -
Not Syncedgallon of gasoline?
-
Not SyncedWell remember, we can read that
off the demand curve -- -
Not Syncedthat's what the demand
curve tells us. -
Not SyncedSo at the controlled price,
when the quantity supplied is Qs, -
Not Syncedbuyers are willing to pay $3
per gallon of gasoline. -
Not SyncedThey're only allowed
to pay in money $1. -
Not SyncedSo, if a buyer were to obtain
a gallon of gasoline -
Not Syncedat a controlled price of $1,
that's actually worth to them $3. -
Not SyncedThat explains why people
are willing to wait in line -
Not Syncedfor a long time
in order to get gasoline, -
Not Syncedbecause the shortage
has reduced the quantity supplied. -
Not SyncedIt's raised the willingness
to pay for gasoline, -
Not Syncedbut it hasn't raised
the price of gasoline. -
Not SyncedTherefore people are willing
to wait in line. -
Not SyncedAnd, in fact, the line will grow
until on the margin -
Not Syncedthe time price plus the money price
will be equal -
Not Syncedto the willingness to pay.
-
Not SyncedSo the line will grow
until the money price, -
Not Syncedwhich is $1/gallon,
plus the time price, -
Not Syncedthe time wasted in line,
which will grow up -
Not Synceduntil it's $2/gallon,
until the total price -
Not Syncedequals the willingness to pay.
-
Not SyncedWhy is that?
-
Not SyncedWell, imagine that that
were not the case. -
Not SyncedImagine that you could obtain
a gallon of gasoline -
Not Syncedwhich is worth $3 for you.
-
Not SyncedAnd you only had to pay a dollar
plus 50 cents in waiting time. -
Not SyncedWell that would be a great deal.
-
Not SyncedSo people will be willing
to wait in line -
Not Syncedso long as the total price,
the money price -
Not Syncedplus the time price, is less
than the willingness to pay. -
Not SyncedThis means that the line
will continue to grow -
Not Synceduntil the total price
is equal to the willingness to pay. -
Not SyncedSo, if we now take the time price,
which is the difference -
Not Syncedbetween the willingness to pay
and the controlled price, -
Not Syncedtimes the quantity --
that gives us the total value -
Not Syncedof wasted time.
-
Not SyncedSo, another effect
of price controls -- -
Not Syncedit creates long lines
in order to compete -
Not Syncedto get the good
instead of bidding the price up, -
Not Syncedthey bid in terms of being willing
to wait in line. -
Not SyncedAnd those lines are wasteful,
creates a lot of wasted time. -
Not SyncedLet's take a look
with a numerical example. -
Not SyncedOkay, here's a simple
numerical example -
Not Syncedto bring this home.
-
Not SyncedSuppose that buyers
value their time at $10/hour, -
Not Syncedand that the average fuel tank
holds 20 gallons. -
Not SyncedNow imagine that a buyer
arrives early -
Not Syncedat the gasoline station
and they wait one hour. -
Not SyncedThe total cost of the gasoline
is then $20, -
Not Synced$1/gallon times 20 gallons
in money cost, -
Not Syncedplus $10 in time cost.
-
Not SyncedThey waited an hour
and they value their time -
Not Syncedat $10/hour.
-
Not SyncedSo the total cost
of the gasoline is then $30. -
Not SyncedIt took $30 worth of time and money
in order to get 20 gallons. -
Not SyncedSo the implied cost per gallon
is $1.50/gallon. -
Not SyncedHowever, remember
that given the quantity supplied, -
Not Syncedgiven the shortage,
the value of gasoline -
Not Syncedis $3/gallon.
-
Not SyncedSo this buyer managed
to obtain something -
Not Syncedwhich is worth $3/gallon
for only $1.50 per gallon. -
Not SyncedThat's a good deal so other buyers
are going to bid up the price -
Not Syncedby arriving earlier and earlier.
-
Not SyncedAnd this is going to push up
the time cost. -
Not SyncedThe money cost is fixed
because of the price control, -
Not Syncedbut the time cost
can still increase. -
Not SyncedIn fact, the line will lengthen
until the total cost -
Not Syncedof obtaining 20 gallons of gasoline
equals $60 or $3/gallon. -
Not SyncedIn other words, the buyers
will end up spending $20 -
Not Syncedin money cost
plus $40 in time cost, -
Not Syncedor four hours of waiting.
-
Not SyncedSo we're able to calculate
approximately how long -
Not Syncedthe line will get.
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Not SyncedIt will get four hours
worth of time. -
Not SyncedSo this again illustrates
that competition -
Not Synceddoes not go away
when we have price controls. -
Not SyncedInstead competition
takes different forms, -
Not Syncedand one of those forms is --
instead of bidding up -
Not Syncedthe money price,
the time price is bid up -
Not Syncedand we get long and wasteful lines.
-
Not SyncedSo what we've just seen
is that in a free market, -
Not Syncedbuyers compete to obtain goods
by bidding up money prices. -
Not SyncedAnd when we have price controls,
one way that buyers compete -
Not Syncedto obtain goods
is by bidding up time prices, -
Not Syncedby being willing to wait in line.
-
Not SyncedSo what's a better form
of competition? -
Not SyncedBidding or paying in money
or paying in time? -
Not SyncedDoes it make a difference?
-
Not SyncedAfter all, some people
have got more money, -
Not Syncedsome people have got more time,
is it just a matter of preference? -
Not SyncedNo. It is much better
to have an economic system -
Not Syncedwhere competition takes the form
of bidding in money -
Not Syncedthan it takes the form
of bidding in time. -
Not SyncedWhy? Paying in time
is much more wasteful. -
Not SyncedWhen you bid in terms of money,
the money goes -
Not Syncedto the station owner.
-
Not SyncedThe money does not disappear.
-
Not SyncedThat purchasing power
is transferred from the consumer -
Not Syncedto the producer.
-
Not SyncedOn the other hand,
when buyers bid in terms of time, -
Not Syncedwhen they wait in line,
that waiting in line is just lost. -
Not SyncedIt's not transferred
to the producer. -
Not SyncedWhen you wait in line
for four hours -
Not Syncedto obtain gasoline,
the seller of gasoline -
Not Synceddoesn't get to add
four hours to his lifespan. -
Not SyncedSo that waiting in line
is just a total loss. -
Not SyncedWhen you pay in money,
the purchasing power is transferred -
Not Syncedto the station owner.
-
Not SyncedWhen you pay in terms of time,
the value of that time -
Not Syncedis simply lost.
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Not SyncedIt benefits no one.
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Not SyncedOkay, quick reminder
of where we are. -
Not SyncedPrice ceilings
have five important effects. -
Not SyncedWe've looked at shortages
and reductions in product quantity. -
Not SyncedWe've just completed wasteful lines
and other search costs. -
Not SyncedUp next, a loss in gains
from trade, -
Not Syncedand then a misallocation
of resources. -
Not Synced- [Narrator] If you want
to test yourself, -
Not Syncedclick "Practice Questions."
-
Not SyncedOr, if you're ready to move on,
just click "Next Video." -
Not Synced♪ [music] ♪
- Title:
- Price Ceilings: Lines and Search Costs
- Description:
-
In this video, we explore two more unintended consequences of price ceilings: long lines and search costs. What was it like waiting in long lines for gasoline back in the 1970s? Not fun. But why did this happen? When price ceilings were imposed on gasoline, people could not use prices to signal how much they were willing to pay for gas. Instead, the only way they could show how much (or how little) they wanted of gasoline, was to wait (or not wait) in line. Going to fuel up becomes less about paying in money and more about paying in time. At the end of the day, paying in time is much more wasteful. In this video, we’ll show how to calculate the value of the time wasted in line.
Microeconomics Course: http://mruniversity.com/courses/principles-economics-microeconomics
Ask a question about the video: http://mruniversity.com/courses/principles-economics-microeconomics/price-ceiling-gasoline-example-search-costs#QandA
Next video: http://mruniversity.com/courses/principles-economics-microeconomics/price-ceiling-deadweight-loss
- Video Language:
- English
- Team:
Marginal Revolution University
- Project:
- Micro
- Duration:
- 10:02
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Martel Espiritu edited English subtitles for Price Ceilings: Lines and Search Costs | |
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Martel Espiritu edited English subtitles for Price Ceilings: Lines and Search Costs | |
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Martel Espiritu edited English subtitles for Price Ceilings: Lines and Search Costs | |
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MRU2 edited English subtitles for Price Ceilings: Lines and Search Costs | |
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MRU2 edited English subtitles for Price Ceilings: Lines and Search Costs | |
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MRU2 edited English subtitles for Price Ceilings: Lines and Search Costs |