Price Ceilings: The US Economy Flounders in the 1970s

In 1971, President Nixon, in an effort to control inflation, declared price increases illegal. Because prices couldn’t increase, they began hitting a ceiling. With a price ceiling, buyers are unable to signal their increased demand by bidding prices up, and suppliers have no incentive to increase quantity supplied because they can’t raise the price.

What results when the quantity demanded exceeds the quantity supplied? A shortage! In the 1970s, for example, buyers began to signal their demand for gasoline by waiting in long lines, if they even had access to gasoline at all. As you’ll recall from the previous section on the price system, prices help coordinate global economic activity. And with price controls in place, the economy became far less coordinated. Join us as we look at real-world examples of price controls and the grave effects these regulations have on trade and industry.
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- [President Nixon] “I am today ordering a freeze
on all prices and wages throughout the United

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

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

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

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

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

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

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

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

is a shortage, shortage. The quantity
demanded exceeds the quantity supplied.

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

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

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

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

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

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

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

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

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

The time just gets wasted.

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

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

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

that construction workers
had to be sent home

and new building
construction delayed.

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

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

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

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

history. And other odd
things started to happen.

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

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

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

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

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

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

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

United States had enough
oil to heat their swimming pools.

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

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

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

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

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

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

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

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

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

move on just click "Next Video."

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