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  • Adriene: Welcome to Crash Course Economics. My name is Adriene Hill

  • Jacob: And I’m Jacob Clifford, and today were going to talk about good intentions,

  • and how they can go wrong. Price controls can derail markets. And subsidies can distort them.

  • Adriene: Anddeadweightisn’t just a good description of your ex.

  • [Theme Music]

  • Jacob: Let’s say Craig becomes president and he caps the prices of all consumer goods.

  • He argues that the lower price will help everyone -- the poor, the middle class, small businesses,

  • everyone. Maybe a few people might fall for this policy, but not you.

  • You watch Crash Course Economics, which means you're funny and smart and attractive, and

  • you understand why this is a horrible idea. This example seems far fetched, but it actually

  • happened...not the part of Craig being president. Instead it was President Richard Nixon.

  • In the early 1970s, Nixon established a 90 day price and wage freeze designed to fight

  • inflation. The general public supported the idea, but economists were skeptical. In fact,

  • Milton Friedman called the freezeone of thosevery plausible schemeswith very

  • pleasing commencements, [that] have often shameful and lamentable conclusions’.”

  • Economists call this idea of the government setting prices, price controls. Now, there's

  • two types and we're gonna look at both of them in the Thought Bubble.

  • Adriene: When the government sets a maximum price for a specific good or service, that’s

  • a price ceiling. Let's say the government forced gas stations to charge a dollar per

  • gallon for gas. This might seem like a good idea, right? Mandated lower gas prices mean

  • we all benefit. Not really. Society is actually made worse off. When the gas prices fall consumers

  • will want to buy more, but producers will no longer find it profitable to sell gas.

  • The lower price will decrease the amount of gasoline produced, and we've got a shortage.

  • A price floor is a law that sets a minimum price in a specific market. The idea is to

  • help by keeping the price artificially high and not allowing the price to fall down to

  • equilibrium. Let’s make up an example using corn. Assume the government set a price floor

  • for a bushel of corn at $7 when the actual equilibrium price is $4. The higher price

  • would give farmers an incentive to produce more, but, at that high price, consumers would

  • go buy substitutes -- things like wheat or rice. Instead of cornflakes they'd buy rice

  • krispies. The point is, the farmers wouldn’t necessarily be better off. They could sell

  • corn at the higher price, but they wouldn’t have as many customers.

  • In terms of actually helping consumers and producers, the vast majority of economists

  • consider price controls counter-productive. But there is one notable exception: minimum

  • wage. The minimum wage is a really complex issue that were going to address in a future video.

  • Jacob: Thanks Thought Bubble. Let’s look at both these policies again using the supply

  • and demand graph. Assume the equilibrium price for gas is $3 and the government sets a price

  • ceiling here, at only $1. At that low price, consumers would want to buy more, so the quantity

  • demanded is gonna be here. The producers have less incentive to produce gas so they're going

  • to make less, so the quantity supplied is right here. The end result is that the quantity

  • bought and sold is going to fall resulting in a shortage. The amount of gas society wants

  • is where supply meets demand. Producing any quantity less than that will result in something

  • that economists call deadweight loss. So the quantity produced at the price ceiling is

  • not allocatively efficient. We're not producing enough. The lower the price ceiling, the more

  • the deadweight loss and inefficiency. Keep in mind that the price ceiling only has an

  • effect on the market when it's below the equilibrium price.

  • Adriene: Many countries still use price ceilings: take Venezuela. In recent years they have

  • been experiencing high inflation, so the government decided to impose price controls on consumer

  • products like basic foods, medicine, and toilet paper. But, the new price is so low relative

  • to the cost of production that farmers and factories can't make money. As a result,

  • they've reduced or halted production of many goods, causing long lines, shortages, and empty shelves.

  • Rent control is another type of price ceiling. Many cities, including New York and San Francisco,

  • put a cap on monthly rent for some apartments. Again, the idea is to increase affordability

  • for tenants, which enables long-term tenants to stay in their homes when real estate prices

  • rise. Meanwhile, the lower rent discourages renovation and new construction, reducing

  • the quantity supplied. The result is a shortage of apartments with landlords that have few

  • incentives to maintain their buildings or be responsive to their tenant’s needs.

  • Economists are not at all split on rent control. Pretty much all of them think that price ceilings

  • on rent reduce the quantity and quality of the housing that's available.

  • Jacob: Now, how about a price floor? Well, look at corn with an equilibrium price of

  • $4 per bushel and a price floor at $7. The higher price will give farmers an incentive

  • to increase the quantity supplied. But, consumers don’t want to pay those higher prices so

  • the quantity demanded's gonna fall. The result is a surplus and deadweight loss, so society's worse off.

  • Now one argument for a price floor on corn is that if farmers can’t get a high enough

  • price, they'll stop producing. Then we will run out of food and die. Economists (except

  • for Malthus) are not fans of starvation so they recognize that the government needs to

  • get involved sometimes to preserve our food supply. But they don't use price floors.

  • Let’s talk about agricultural subsidies.

  • Adriene: A subsidy is a government payment given to individuals or businesses. And they're

  • often designed to offset costs to advance a specific public goal.

  • Let's say the government subsidizes farmers that produce strawberries. This encourages

  • them to increase supply and the result is more strawberries and a lower price. At first

  • glance, this sounds like a great idea. Prices for consumers fall, farmers get more money,

  • and the market remains at equilibrium. There is no shortage or surplus. Proponents of farm

  • subsidies say they can help provide a stable living to farmers, limit food price inflation,

  • and make sure we grow enough food to feed everyone.

  • But before you go out and become a lobbyist for farm subsidies, keep in mind that economists

  • don't like them. For one, many farmers these days are not poor. By some estimates they

  • make more than non-farm families. Farmers, economists argue, have the income they need

  • to handle price shocks. Economists also think that subsidies might discourage farmers from

  • innovating and rethinking how they farm because they have guaranteed income from the government.

  • A survey of economists found that 85% think the United States should eliminate agricultural subsidies.

  • But what do economists have against farmers?

  • Jacob: Economists don’t have it in for anybody. Except maybe physicists, because they have

  • unbreakable laws and perfectly controlled experiments. Man I wish economics was a science!

  • Economists recognize that market prices are set for a reason. If corn prices are down

  • because demand has fallen, then it's inefficient and wasteful to spend money on subsidies.

  • That said, if there is a drought or other natural disaster affecting farmers then some

  • sort of short-term aid might be needed to keep farmers on their feet. But today, farm

  • subsidies in the US were not about giving a little money to help ma and pa make it through a tough season.

  • Adriene: In the US, agricultural subsidies have been around since the Great Depression.

  • They were meant to help prop up farm prices and farmers. The Agricultural Adjustment Act

  • of 1933 paid farmers not to grow crops on some of their land. The government also bought

  • up excess crops. For decades after, farmers of crops like corn, wheat, cotton, and soybeans

  • received government help. In the late 1990s Congress added new farm programs, including

  • what are called direct payments. Basically, the government handed out checks to farmers

  • based on land ownership and historical production levels. Farmers got them regardless of the

  • market price for crops or how much they produced.

  • According to The Washington Post, “In 2005 alone, when pretax farm profits were at a

  • near-record $72 billion, the federal government handed out more than $25 billion in aid…”

  • That was almost 50% more than it paid to families on welfare. The Washington Post also found

  • the government gave over 1.3 billion dollars to people that didn't farm at all.

  • In 2014, the government eliminated this system of direct payment subsidies. Farm subsidies

  • still cost the government $20 billion dollars a year, but a large portion goes to helping

  • farmers pay for crop insurance.

  • But economists don't like this much either. Some argue that any form of government assistance

  • distorts the market, resulting in unintended consequences. For one, it guarantees farmers

  • an income, and perhaps encourages them to take more risks, like planting on less fertile land.

  • Jacob: So is it ever appropriate for the government to give a subsidy? Well, let’s look at the

  • supply and demand graph again. A market's going to produce the equilibrium quantity

  • and, in most cases, that is exactly the amount society wants. But what if the amount society

  • actually wants is much greater? What if there is something special about this product that

  • buyers and sellers aren’t factoring in? In this case, the amount being produced is

  • less than the amount society wants. The result would be deadweight loss. The inefficiency caused

  • by the underproduction of this product. A subsidy would make society better off and improve efficiency.

  • Adriene: Let’s look at renewable energy technology. Some economists like government subsidies

  • for research and development in energy. They argue that things like solar panels would be underdeveloped

  • and underproduced without government action and that subsidies reduce deadweight loss.

  • Other economists point out that businesses already have an incentive to innovate, and

  • that subsidies create false demand. In essence, they argue that there is no deadweight loss,

  • and even if there is, markets will adjust. The takeaway from this debate is that subsidies

  • aren't inherently good or bad, it just depends on the values of society and markets in question.

  • Just think, because of NASA, we have things like scratch-resistant lenses, memory foam, Moonbase Alpha.

  • Jacob: So we stand by our claim, markets work. They help us to determine the quantity we

  • should produce and help us to use our resources efficiently. Now, government policies like

  • price ceilings and floors often fail to make all of us better off.

  • Adriene: Sometimes, markets fail. And that's when the government needs to step in.

  • Thanks for watching. Well see you next week.

  • Jacob: Crash Course Economics was made with help of all of these nice people. You can

  • support Crash Course at Patreon, where you can help keep Crash Course free for everyone,

  • forever, and get great rewards. Thanks for watching and DFTBA.

Adriene: Welcome to Crash Course Economics. My name is Adriene Hill

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