Price Ceilings: Lines and Search Costs
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0:00 - 0:05♪ [music] ♪
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0:09 - 0:13- [Alex] In this video, we're going
to take a look at another effect -
0:13 - 0:17of price ceilings: wasteful lines
and other search costs. -
0:17 - 0:19Let's get started.
-
0:23 - 0:25It's important to understand
that price controls -
0:25 - 0:28do not eliminate competition.
-
0:28 - 0:33Competition for scarce goods
is an ever present force -
0:33 - 0:36under all forms
of social organization. -
0:36 - 0:39What price controls do
is they change the form -
0:39 - 0:41that competition takes.
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0:41 - 0:46So in a market, demanders compete
by pushing prices up. -
0:46 - 0:50Suppliers compete
by pushing prices down. -
0:50 - 0:53When we have price controls,
that shifting of prices -
0:53 - 0:55is no longer possible.
-
0:55 - 0:58But competition remains --
it just takes other forms. -
0:58 - 1:01Here's an example
of musical chairs. -
1:01 - 1:05The quantity demanded
exceeds the quantity supplied. -
1:05 - 1:07There's a shortage.
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1:07 - 1:09But there's still lots
of competition, -
1:09 - 1:12lots of scrambling
to get hold of those goods -
1:12 - 1:14which are in short supply.
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1:14 - 1:17So let's take a closer look
at some of the forms -
1:17 - 1:20that competition takes
when we have price controls -
1:20 - 1:22and shortages.
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1:23 - 1:26So suppose there's a price control
on gasoline and oil, -
1:26 - 1:28making it illegal to compete
for these goods -
1:28 - 1:30by pushing the price up.
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1:30 - 1:32Nevertheless, there are other ways
of competing. -
1:32 - 1:34Some buyers, for example,
might try bribing -
1:34 - 1:36the station owners.
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1:36 - 1:38This is not necessarily
the first thing which would happen -
1:38 - 1:41in the United States,
but in other places and countries -
1:41 - 1:43this is extremely common.
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1:43 - 1:45Having a cousin who works
in the factory -
1:45 - 1:47which is producing the good
which is in shortage -
1:47 - 1:49is extremely important.
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1:49 - 1:53Using one's political connections,
being part of the political elite -
1:53 - 1:55is extremely important
for obtaining goods, -
1:55 - 1:56which are in shortage.
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1:56 - 2:00Even in the United States,
remember that firms -
2:00 - 2:03also need oil and gasoline
in order to operate. -
2:03 - 2:06And in the 1970s when there
was a shortage of oil, -
2:06 - 2:09firms appealed
to the Department of Energy, -
2:09 - 2:12they lobbied their Congressman
and their Senator -
2:12 - 2:15to obtain an allocation of oil
for their firm. -
2:16 - 2:18For consumers, another way
to obtain the good -
2:18 - 2:21is to be willing to wait in line.
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2:21 - 2:24Now time waiting in line
is also a cost. -
2:24 - 2:28So let's ask,
"How long will the line get?" -
2:28 - 2:31We can use our model
to understand willingness -
2:31 - 2:34to wait in line and how long
the lines will get. -
2:34 - 2:35Let's take a look.
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2:36 - 2:38So here's our supply
and demand diagram -
2:38 - 2:39of the shortage.
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2:39 - 2:41Remember that
at the controlled price -
2:41 - 2:44we read the quantity demanded
off the demand curve, Qd, -
2:44 - 2:47and at the controlled price
we read the quantity supplied -
2:47 - 2:49off the supply curve, Qs.
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2:49 - 2:53So Qs is the actual amount
of gasoline supplied -
2:53 - 2:56given the controlled price of $1.
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2:56 - 3:01Now, here is the key question:
How much are buyers willing -
3:01 - 3:07to pay for a gallon of gasoline,
when Qs is the amount -
3:07 - 3:09which is being supplied?
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3:09 - 3:10How much are buyers willing to pay?
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3:10 - 3:12What is the most they
are willing to pay -
3:12 - 3:14for a gallon of gasoline?
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3:14 - 3:17Well remember, we can read that
off the demand curve -- -
3:17 - 3:19that's what the demand
curve tells us. -
3:19 - 3:23So at the controlled price,
when the quantity supplied is Qs, -
3:23 - 3:28buyers are willing to pay $3
per gallon of gasoline. -
3:28 - 3:32They're only allowed
to pay in money $1. -
3:32 - 3:38So, if a buyer were to obtain
a gallon of gasoline -
3:38 - 3:43at a controlled price of $1,
that's actually worth to them $3. -
3:44 - 3:48That explains why people
are willing to wait in line -
3:48 - 3:52for a long time
in order to get gasoline, -
3:52 - 3:55because the shortage
has reduced the quantity supplied. -
3:55 - 3:59It's raised the willingness
to pay for gasoline, -
3:59 - 4:02but it hasn't raised
the price of gasoline. -
4:03 - 4:06Therefore people are willing
to wait in line. -
4:06 - 4:11And, in fact, the line will grow
until on the margin -
4:11 - 4:17the time price plus the money price
will be equal -
4:17 - 4:19to the willingness to pay.
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4:19 - 4:22So the line will grow
until the money price, -
4:22 - 4:27which is $1/gallon,
plus the time price, -
4:27 - 4:31the time wasted in line,
which will grow up -
4:31 - 4:34until it's $2/gallon,
until the total price -
4:34 - 4:37equals the willingness to pay.
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4:37 - 4:38Why is that?
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4:38 - 4:40Well, imagine that that
were not the case. -
4:40 - 4:44Imagine that you could obtain
a gallon of gasoline -
4:44 - 4:46which is worth $3 for you.
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4:46 - 4:50And you only had to pay a dollar
plus 50 cents in waiting time. -
4:51 - 4:52Well that would be a great deal.
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4:52 - 4:55So people will be willing
to wait in line -
4:55 - 5:00so long as the total price,
the money price -
5:00 - 5:03plus the time price, is less
than the willingness to pay. -
5:03 - 5:06This means that the line
will continue to grow -
5:06 - 5:10until the total price
is equal to the willingness to pay. -
5:10 - 5:15So, if we now take the time price,
which is the difference -
5:15 - 5:19between the willingness to pay
and the controlled price, -
5:19 - 5:23times the quantity --
that gives us the total value -
5:23 - 5:24of wasted time.
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5:25 - 5:28So, another effect
of price controls -- -
5:28 - 5:31it creates long lines
in order to compete -
5:31 - 5:34to get the good
instead of bidding the price up, -
5:34 - 5:37they bid in terms of being willing
to wait in line. -
5:37 - 5:41And those lines are wasteful,
creates a lot of wasted time. -
5:42 - 5:45Let's take a look
with a numerical example. -
5:45 - 5:47Okay, here's a simple
numerical example -
5:47 - 5:48to bring this home.
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5:48 - 5:52Suppose that buyers
value their time at $10/hour, -
5:52 - 5:55and that the average fuel tank
holds 20 gallons. -
5:55 - 5:57Now imagine that a buyer
arrives early -
5:57 - 6:00at the gasoline station
and they wait one hour. -
6:00 - 6:05The total cost of the gasoline
is then $20, -
6:05 - 6:08$1/gallon times 20 gallons
in money cost, -
6:08 - 6:10plus $10 in time cost.
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6:10 - 6:13They waited an hour
and they value their time -
6:13 - 6:15at $10/hour.
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6:15 - 6:18So the total cost
of the gasoline is then $30. -
6:19 - 6:24It took $30 worth of time and money
in order to get 20 gallons. -
6:24 - 6:27So the implied cost per gallon
is $1.50/gallon. -
6:28 - 6:32However, remember
that given the quantity supplied, -
6:32 - 6:35given the shortage,
the value of gasoline -
6:35 - 6:37is $3/gallon.
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6:37 - 6:39So this buyer managed
to obtain something -
6:39 - 6:44which is worth $3/gallon
for only $1.50 per gallon. -
6:45 - 6:51That's a good deal so other buyers
are going to bid up the price -
6:51 - 6:53by arriving earlier and earlier.
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6:53 - 6:56And this is going to push up
the time cost. -
6:56 - 6:59The money cost is fixed
because of the price control, -
6:59 - 7:02but the time cost
can still increase. -
7:02 - 7:07In fact, the line will lengthen
until the total cost -
7:07 - 7:14of obtaining 20 gallons of gasoline
equals $60 or $3/gallon. -
7:15 - 7:18In other words, the buyers
will end up spending $20 -
7:18 - 7:23in money cost
plus $40 in time cost, -
7:23 - 7:26or four hours of waiting.
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7:26 - 7:29So we're able to calculate
approximately how long -
7:29 - 7:30the line will get.
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7:30 - 7:34It will get four hours
worth of time. -
7:34 - 7:37So this again illustrates
that competition -
7:37 - 7:40does not go away
when we have price controls. -
7:41 - 7:44Instead, competition
takes different forms, -
7:44 - 7:47and one of those forms is --
instead of bidding up -
7:47 - 7:51the money price,
the time price is bid up -
7:51 - 7:53and we get long and wasteful lines.
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7:55 - 7:57So what we've just seen
is that in a free market, -
7:57 - 8:01buyers compete to obtain goods
by bidding up money prices. -
8:02 - 8:06And when we have price controls,
one way that buyers compete -
8:06 - 8:09to obtain goods
is by bidding up time prices, -
8:09 - 8:11by being willing to wait in line.
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8:12 - 8:14So what's a better form
of competition? -
8:14 - 8:17Bidding or paying in money
or paying in time? -
8:17 - 8:18Does it make a difference?
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8:18 - 8:20After all, some people
have got more money, -
8:20 - 8:24some people have got more time,
is it just a matter of preference? -
8:24 - 8:28No. It is much better
to have an economic system -
8:28 - 8:32where competition takes the form
of bidding in money -
8:32 - 8:35than it takes the form
of bidding in time. -
8:35 - 8:41Why? Paying in time
is much more wasteful. -
8:41 - 8:45When you bid in terms of money,
the money goes -
8:45 - 8:47to the station owner.
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8:47 - 8:49The money does not disappear.
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8:49 - 8:52That purchasing power
is transferred from the consumer -
8:52 - 8:54to the producer.
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8:54 - 8:59On the other hand,
when buyers bid in terms of time, -
8:59 - 9:03when they wait in line,
that waiting in line is just lost. -
9:03 - 9:06It's not transferred
to the producer. -
9:06 - 9:08When you wait in line
for four hours -
9:08 - 9:12to obtain gasoline,
the seller of gasoline -
9:12 - 9:16doesn't get to add
four hours to his lifespan. -
9:16 - 9:20So that waiting in line
is just a total loss. -
9:20 - 9:24When you pay in money,
the purchasing power is transferred -
9:24 - 9:26to the station owner.
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9:26 - 9:29When you pay in terms of time,
the value of that time -
9:29 - 9:31is simply lost.
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9:31 - 9:33It benefits no one.
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9:33 - 9:35Okay, quick reminder
of where we are. -
9:35 - 9:38Price ceilings
have five important effects. -
9:38 - 9:41We've looked at shortages
and reductions in product quantity. -
9:41 - 9:44We've just completed wasteful lines
and other search costs. -
9:44 - 9:47Up next, a loss in gains
from trade, -
9:47 - 9:49and then a misallocation
of resources. -
9:50 - 9:52- [Narrator] If you want
to test yourself, -
9:52 - 9:54click "Practice Questions."
-
9:54 - 9:57Or, if you're ready to move on,
just click "Next Video." -
9:57 - 10:01♪ [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
Martel Espiritu edited English subtitles for Price Ceilings: Lines and Search Costs | ||
Martel Espiritu edited English subtitles for Price Ceilings: Lines and Search Costs | ||
Martel Espiritu edited English subtitles for Price Ceilings: Lines and Search Costs | ||
MRU2 edited English subtitles for Price Ceilings: Lines and Search Costs | ||
MRU2 edited English subtitles for Price Ceilings: Lines and Search Costs | ||
MRU2 edited English subtitles for Price Ceilings: Lines and Search Costs |