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Price Controls, Subsidies, and the Risks of Good Intentions: Crash Course Economics #20 - YouTube
Channel: CrashCourse
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Adriene: Welcome to Crash Course Economics.
My name is Adriene Hill
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Jacob: And Iâm Jacob Clifford, and today
weâre going to talk about good intentions,
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and how they can go wrong. Price controls
can derail markets. And subsidies can distort them.
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Adriene: And âdeadweightâ isnât just
a good description of your ex.
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[Theme Music]
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Jacob: Letâs say Craig becomes president
and he caps the prices of all consumer goods.
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He argues that the lower price will help everyone
-- the poor, the middle class, small businesses,
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everyone. Maybe a few people might fall for
this policy, but not you.
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You watch Crash Course Economics, which means
you're funny and smart and attractive, and
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you understand why this is a horrible idea.
This example seems far fetched, but it actually
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happened...not the part of Craig being president.
Instead it was President Richard Nixon.
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In the early 1970s, Nixon established a 90
day price and wage freeze designed to fight
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inflation. The general public supported the
idea, but economists were skeptical. In fact,
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Milton Friedman called the freeze âone of
those âvery plausible schemesâŠwith very
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pleasing commencements, [that] have often
shameful and lamentable conclusionsâ.â
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Economists call this idea of the government
setting prices, price controls. Now, there's
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two types and we're gonna look at both of
them in the Thought Bubble.
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Adriene: When the government sets a maximum
price for a specific good or service, thatâs
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a price ceiling. Let's say the government
forced gas stations to charge a dollar per
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gallon for gas. This might seem like a good
idea, right? Mandated lower gas prices mean
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we all benefit. Not really. Society is actually
made worse off. When the gas prices fall consumers
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will want to buy more, but producers will
no longer find it profitable to sell gas.
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The lower price will decrease the amount of
gasoline produced, and we've got a shortage.
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A price floor is a law that sets a minimum
price in a specific market. The idea is to
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help by keeping the price artificially high
and not allowing the price to fall down to
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equilibrium. Letâs make up an example using
corn. Assume the government set a price floor
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for a bushel of corn at $7 when the actual
equilibrium price is $4. The higher price
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would give farmers an incentive to produce
more, but, at that high price, consumers would
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go buy substitutes -- things like wheat or
rice. Instead of cornflakes they'd buy rice
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krispies. The point is, the farmers wouldnât
necessarily be better off. They could sell
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corn at the higher price, but they wouldnât
have as many customers.
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In terms of actually helping consumers and
producers, the vast majority of economists
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consider price controls counter-productive.
But there is one notable exception: minimum
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wage. The minimum wage is a really complex
issue that weâre going to address in a future video.
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Jacob: Thanks Thought Bubble. Letâs look
at both these policies again using the supply
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and demand graph. Assume the equilibrium price
for gas is $3 and the government sets a price
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ceiling here, at only $1. At that low price,
consumers would want to buy more, so the quantity
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demanded is gonna be here. The producers have
less incentive to produce gas so they're going
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to make less, so the quantity supplied is
right here. The end result is that the quantity
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bought and sold is going to fall resulting
in a shortage. The amount of gas society wants
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is where supply meets demand. Producing any
quantity less than that will result in something
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that economists call deadweight loss. So the
quantity produced at the price ceiling is
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not allocatively efficient. We're not producing
enough. The lower the price ceiling, the more
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the deadweight loss and inefficiency. Keep
in mind that the price ceiling only has an
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effect on the market when it's below the equilibrium
price.
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Adriene: Many countries still use price ceilings:
take Venezuela. In recent years they have
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been experiencing high inflation, so the government
decided to impose price controls on consumer
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products like basic foods, medicine, and toilet
paper. But, the new price is so low relative
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to the cost of production that farmers and
factories can't make money. As a result,
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they've reduced or halted production of many goods,
causing long lines, shortages, and empty shelves.
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Rent control is another type of price ceiling.
Many cities, including New York and San Francisco,
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put a cap on monthly rent for some apartments.
Again, the idea is to increase affordability
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for tenants, which enables long-term tenants
to stay in their homes when real estate prices
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rise. Meanwhile, the lower rent discourages
renovation and new construction, reducing
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the quantity supplied. The result is a shortage
of apartments with landlords that have few
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incentives to maintain their buildings or
be responsive to their tenantâs needs.
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Economists are not at all split on rent control.
Pretty much all of them think that price ceilings
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on rent reduce the quantity and quality of
the housing that's available.
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Jacob: Now, how about a price floor? Well,
look at corn with an equilibrium price of
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$4 per bushel and a price floor at $7. The
higher price will give farmers an incentive
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to increase the quantity supplied. But, consumers
donât want to pay those higher prices so
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the quantity demanded's gonna fall. The result is
a surplus and deadweight loss, so society's worse off.
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Now one argument for a price floor on corn
is that if farmers canât get a high enough
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price, they'll stop producing. Then we will
run out of food and die. Economists (except
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for Malthus) are not fans of starvation so
they recognize that the government needs to
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get involved sometimes to preserve our food
supply. But they don't use price floors.
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Letâs talk about agricultural subsidies.
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Adriene: A subsidy is a government payment
given to individuals or businesses. And they're
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often designed to offset costs to advance
a specific public goal.
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Let's say the government subsidizes farmers
that produce strawberries. This encourages
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them to increase supply and the result is
more strawberries and a lower price. At first
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glance, this sounds like a great idea. Prices
for consumers fall, farmers get more money,
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and the market remains at equilibrium. There
is no shortage or surplus. Proponents of farm
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subsidies say they can help provide a stable
living to farmers, limit food price inflation,
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and make sure we grow enough food to feed
everyone.
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But before you go out and become a lobbyist
for farm subsidies, keep in mind that economists
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don't like them. For one, many farmers these
days are not poor. By some estimates they
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make more than non-farm families. Farmers,
economists argue, have the income they need
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to handle price shocks. Economists also think
that subsidies might discourage farmers from
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innovating and rethinking how they farm because
they have guaranteed income from the government.
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A survey of economists found that 85% think the
United States should eliminate agricultural subsidies.
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But what do economists have against farmers?
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Jacob: Economists donât have it in for anybody.
Except maybe physicists, because they have
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unbreakable laws and perfectly controlled
experiments. Man I wish economics was a science!
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Economists recognize that market prices are
set for a reason. If corn prices are down
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because demand has fallen, then it's inefficient
and wasteful to spend money on subsidies.
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That said, if there is a drought or other
natural disaster affecting farmers then some
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sort of short-term aid might be needed to
keep farmers on their feet. But today, farm
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subsidies in the US were not about giving a little money
to help ma and pa make it through a tough season.
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Adriene: In the US, agricultural subsidies
have been around since the Great Depression.
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They were meant to help prop up farm prices
and farmers. The Agricultural Adjustment Act
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of 1933 paid farmers not to grow crops on
some of their land. The government also bought
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up excess crops. For decades after, farmers
of crops like corn, wheat, cotton, and soybeans
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received government help. In the late 1990s
Congress added new farm programs, including
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what are called direct payments. Basically,
the government handed out checks to farmers
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based on land ownership and historical production
levels. Farmers got them regardless of the
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market price for crops or how much they produced.
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According to The Washington Post, âIn 2005
alone, when pretax farm profits were at a
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near-record $72 billion, the federal government
handed out more than $25 billion in aidâŠâ
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That was almost 50% more than it paid to families
on welfare. The Washington Post also found
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the government gave over 1.3 billion dollars
to people that didn't farm at all.
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In 2014, the government eliminated this system
of direct payment subsidies. Farm subsidies
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still cost the government $20 billion dollars
a year, but a large portion goes to helping
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farmers pay for crop insurance.
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But economists don't like this much either.
Some argue that any form of government assistance
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distorts the market, resulting in unintended
consequences. For one, it guarantees farmers
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an income, and perhaps encourages them to
take more risks, like planting on less fertile land.
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Jacob: So is it ever appropriate for the government
to give a subsidy? Well, letâs look at the
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supply and demand graph again. A market's
going to produce the equilibrium quantity
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and, in most cases, that is exactly the amount
society wants. But what if the amount society
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actually wants is much greater? What if there
is something special about this product that
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buyers and sellers arenât factoring in?
In this case, the amount being produced is
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less than the amount society wants. The result
would be deadweight loss. The inefficiency caused
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by the underproduction of this product. A subsidy
would make society better off and improve efficiency.
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Adriene: Letâs look at renewable energy technology.
Some economists like government subsidies
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for research and development in energy. They argue
that things like solar panels would be underdeveloped
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and underproduced without government action
and that subsidies reduce deadweight loss.
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Other economists point out that businesses
already have an incentive to innovate, and
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that subsidies create false demand. In essence,
they argue that there is no deadweight loss,
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and even if there is, markets will adjust.
The takeaway from this debate is that subsidies
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aren't inherently good or bad, it just depends
on the values of society and markets in question.
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Just think, because of NASA, we have things like
scratch-resistant lenses, memory foam, Moonbase Alpha.
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Jacob: So we stand by our claim, markets work.
They help us to determine the quantity we
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should produce and help us to use our resources
efficiently. Now, government policies like
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price ceilings and floors often fail to make
all of us better off.
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Adriene: Sometimes, markets fail. And that's
when the government needs to step in.
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Thanks for watching. Weâll see you next week.
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Jacob: Crash Course Economics was made with
help of all of these nice people. You can
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support Crash Course at Patreon, where you
can help keep Crash Course free for everyone,
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forever, and get great rewards. Thanks for
watching and DFTBA.
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