Price Controls, Subsidies, and the Risks of Good Intentions: Crash Course Economics #20

CrashCourse
13 Jan 201610:14
EducationalLearning
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TLDRThis Crash Course Economics video examines price controls and subsidies. It explains price ceilings and floors, using real-world examples like Nixon's wage freeze and Venezuela's price controls. It discusses deadweight loss and efficiency. The hosts outline arguments for and against agricultural subsidies in the US, noting they distort markets but may serve social goals. Overall, the video cautions that while free markets generally maximize efficiency, governments sometimes need to intervene, like with renewable energy subsidies, to correct market failures.

Takeaways
  • 😟 Price controls like ceilings and floors often fail to improve markets and make society worse off.
  • 👎 Setting maximum prices with ceilings creates shortages, while minimum prices with floors cause surpluses.
  • 📉 Both price controls and subsidies distort markets away from equilibrium quantity.
  • 😠 The distorted quantities mean deadweight loss and inefficiency for society.
  • 🤔 Subsidies can sometimes help fix underproduction, but usually make things worse.
  • 🧐 Agricultural subsidies were meant to help farmers but now mostly benefit large farms.
  • 😡 Critics argue farm subsidies encourage risky practices and discourage innovation.
  • 😀 Subsidies for things like renewable energy can reduce deadweight loss.
  • ⏳ Supporters and critics fiercely debate the impact of subsidies.
  • 😊 Ultimately the value of any subsidy depends on societal goals and the market.
Q & A

  • What is a price ceiling and how does it impact markets?

    -A price ceiling is when the government sets a maximum price for a good or service, below the equilibrium market price. It can lead to shortages and inefficiency because at the lower price, demand increases but suppliers produce less.

  • How did President Nixon's wage and price freeze impact the economy?

    -Nixon imposed a 90-day wage and price freeze in the 1970s to fight inflation. Most economists opposed it, predicting it would have negative consequences. As predicted, it led to shortages and market inefficiencies.

  • What are the two main types of price controls?

    -The two main types of price controls are price ceilings, which set a maximum price, and price floors, which set a minimum price. Both tend to cause surpluses or shortages.

  • What is deadweight loss and how can it result from price controls?

    -Deadweight loss refers to the loss of economic efficiency when the equilibrium quantity is not produced. It can result from price controls because they prevent the market from reaching equilibrium quantity.

  • How do agricultural subsidies impact farmers and the market?

    -Agricultural subsidies guarantee income for farmers and encourage production. This can distort markets by propping up prices and production levels artificially.

  • When can subsidies improve economic efficiency?

    -Subsidies can improve efficiency when they are used to encourage production of goods that are under-produced relative to the socially optimal level. This reduces deadweight loss.

  • How did the US agricultural subsidies start and evolve over time?

    -They started in the Great Depression to prop up farm prices by paying farmers not to grow crops. Over time they evolved into direct payment checks and crop insurance subsidies.

  • What concerns do economists have about rent control?

    -Most economists oppose rent control because the price ceilings reduce housing supply and quality. Landlords have little incentive to maintain properties or build new housing.

  • How do price floors impact markets?

    -Price floors set an artificial minimum price above equilibrium, encouraging more production but reducing demand. This leads to surpluses.

  • What happens when the government caps consumer good prices?

    -Capping consumer good prices below equilibrium causes shortages and deadweight loss. Consumers want to buy more but suppliers produce less at the lower price.

Outlines
00:00
😀 Introducing Price Controls and Their Effects

Adriene and Jacob introduce the concept of price controls, explaining how government-mandated maximum or minimum prices can distort markets and lead to shortages, surpluses and deadweight loss. They give examples of price ceilings like rent control and Richard Nixon's wage and price freeze in the 1970s, as well as price floors like those used in agriculture.

05:04
😕Examining Agricultural Subsidies and Their Impacts

The hosts explain how agricultural subsidies work and their intended benefits, but also economists' criticisms of farm subsidies. Subsidies may prop up farm prices but can reduce incentives to innovate and lead to overproduction and unintended consequences. Direct payments have cost billions while sometimes going to non-farmers.

Mindmap
Keywords
💡price controls
Price controls are government mandated limits on how high or low prices can go in a market. In the video, price controls like price ceilings on consumer goods and price floors on agricultural products are discussed. Price controls often lead to shortages or surpluses because they prevent equilibrium between supply and demand.
💡deadweight loss
Deadweight loss refers to the loss of economic efficiency when the quantity produced and consumed in a market is not the equilibrium quantity. It is illustrated in the video using examples of price ceilings and floors. Deadweight loss represents value that is lost to society due to inefficiency.
💡shortage
A shortage occurs when the price is artificially low due to price controls and the quantity demanded exceeds the quantity supplied. The video explains how price ceilings can lead to shortages, using examples like rent control and the gas shortage.
💡surplus
A surplus occurs when the price is artificially high due to price controls and quantity supplied exceeds quantity demanded. The video discusses agricultural price floors resulting in crop surpluses.
💡subsidy
A subsidy is a government payment to producers, often to supplement their income. The video analyzes farm subsidies and debates their economic impacts. Subsidies can help address market failures but also have unintended consequences.
💡allocative efficiency
Allocative efficiency is achieved when the quantity produced and consumed is the equilibrium quantity where supply and demand curves intersect. The video argues price controls lead to deadweight losses because they prevent allocative efficiency.
💡price ceiling
A price ceiling is a maximum price set by the government, below the equilibrium price. The video provides examples like rent control and Nixon's wage-price freeze to illustrate consequences of price ceilings.
💡price floor
A price floor is a minimum price set by the government, above the equilibrium price. The video analyzes price floors for agricultural products and their unintended effects like surpluses.
💡market failure
Market failure is when the market mechanism fails to efficiently allocate resources or meet society's needs. The video discusses subsidizing renewable energy to address potential market failures in innovation.
💡unintended consequences
Unintended consequences are outcomes of a policy or regulation that are not the desired objectives. The video highlights how agricultural subsidies and price controls often lead to negative unintended consequences.
Highlights

First significant research finding

Introduction of new theoretical framework

Description of innovative methodology

Transcripts

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