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

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


Adriene: Welcome to Crash Course Economics.
My name is Adriene Hill Jacob: And I’m Jacob Clifford, and today
we’re going to talk about good intentions, and how they can go wrong. Price controls
can derail markets. And subsidies can distort them. Adriene: And “deadweight” isn’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 freeze “one of
those ‘very plausible schemes…with 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 we’re 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. We’ll 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.

100 COMMENTS

    my hands are shaking! my body is shaking from all this studying! But i'm still getting the headshots! OH getting da headshots WOAH getting the headshots

    In school, my class had a aimulation of the 1920s and Great Depression. Currently we had to propose a bill assigned to us to help the economy, mine was the AAA, it would have gotten passed except for two guys who got the class to say no because one of my partners was rich in the simulation. Now I'm sitting on the floor because my 'farm' (desk) was sold for not having enough money. Now I want revenge, I found out that those two guys are doing the NIRA, Can you make a video explaining some flaws economists find in this bill? I would love to bring their bill down.

    A ver si entendí la última parte del video xD…

    – Políticas gubernamentales (regulación del mercado) > CON FRECUENCIA fallan en traernos beneficios…
    – Mercados > ALGUNAS VECES fallan…

    Creo es un poco tendencioso xD

    Y lo del final me sorprendió… Hay que intervenir en el mercado cuando fallan… Nada de preveer? jajajja

    Claro, dejemos que pase otra crisis como la del 2008… Ya Trump comenzó a desregular lo poco que Obama reguló…

    "Because of NASA we have memory foam, scratch proof lenses, and moon base alpha." We provide them with over $18 billion a year and their impersonating a manufacturing company. Totally worth it.

    "except for maybe physicists, because they have unbreakable laws and controlled experiments"
    oh my sweet summer child, you have no idea how wrong you are. (Quantum physics, AKA: everything you know is wrong.)

    How does someone "adjust" for inflation? i mean to ask that there might be some factors or formulas to do the same, so how is it done?

    So what is the answer for the poor? People who have little money meanwhile prices on food skyrocket and the result is you cant feed yourself or your family. The rich stay well fed and healthy while the poor starve on crumbs and poor healthcare and eventually die. Problem solved

    I find it funny that crash course explains the negative consequences of price controls and subsidies, but can't apply this same logic to the single payer healthcare system.

    There's those strawberries again. You guys must have played SimFarm back in the day. Strawberries were the best cash crop you could get rich on.

    Am I confused or is their graph of the deadweight loss wrong? Look for example at the Graph in Wiki – https://www.wikiwand.com/en/Deadweight_loss. Also they have positive production of gasoline at $0?

    Perhaps subsidies are good for situations where the rapid roll out of a particular product is highly beneficial, like renewable power being rolled out quickly to reduce climate change. There's factors outside the market that increase the importance of rapid implementation.

    What about India ? The country practices Price ceilings(except gasoline) , gives massive subsidies on basic necessities and on agriculture, gives around 6.5 percent interest on your term deposits and 4 percent interest on your savings account , having a 3.5% inflation rate and still can be one of the fastest growing economies (GDP growth around 7 percent). What's going on there , according to 'Economists' ?

    In the supply and demand graph, why does ceiling is represented lower and floor higher. Why is it just opposite to what it should be?

    Economists like to pretend to be scientists, yet here they're clearly making value judgements, decision what is good or bad, right and wrong. You can't say too much or too little of something is being produced unless you make a value judgement (and economists seen to assume that the ideal distribution is that which would result from a hypothetical free market, with 'market failure' simply be it that which deviates from this ideal).

    The government can push innovations without having to cut subsidies, an obvious fact that people seem to be missing. Incentive doesn't have to come from an empty bank account. The government could give grants to potential innovators, subsidize loans for technology adoptors and even use advertisement and seminars to encourage innovation.

    In their analysis of "the benefit to society", they are only considering what is seen within this market. They are not considering the fact that the money collected to provide a subsidy has been taken in small portions from all Americans through taxation. This money would have been equally effective in providing incentives to increase the supply of agricultural products in the hands of private individuals as it would be in the hands of the government and also be less costly to the nation as a whole.

    If there are corn shortages due to a bad year in the US, prices would rise, which would make it more profitable to import corn from other countries. In time, the higher prices of corn will provide the incentive to American farm investors to rebuild failed farms, thus restoring American corn output and prices to their original levels.

    Government subsidies presuppose the government's ability to know what demand there is and will be for corn. They also inevitably give way to corruption and further extortion of the public as recipients of farm subsidies lobby to retain and expand their subsidies. This leads to large amounts of money given by agricultural bodies to candidates in the form of campaign contributions, with the candidate promising to pay them back once in office. Not good.

    “Welfare and free health care?? PSHH, LAZY THIEVING INGRATES!!

    Don’t take away my subsidies tho cause I’ll be broke..”

    Let me just sum this up for everyone. Don't do things the rich don't like, or you'll pay for it in the long run. Pretty simple.

    America's current policy on agriculture is subsidies for agriculture and tariffs on foreign fruits. This is supposed to help farmers in America. The problem is that this policy comes at the cost of the American taxpayer who has to pay for these subsidies. Only 2% of Americans work in agriculture and even most of them don't benefit from subsidies. The ones who benefit are usually farming companies.

    I am disappointed at the dead seriousness and annoyed sarcasm of these comments…

    Ah well, at least there's still a comment about Mr. Clifford's ACDC belt.

    If every price is set by the government, why would their be shortage (assuming all things produced domestically). If someone doesn't make gas with their factory because of price controls, they waste their machines by idling them (assuming they can't sell to other countries), so why would they stop production?

    This seems to pretend that the government is incapable of fixing any of these "problems". With rent controls for example, why should it cause a housing shortage? People still sell their homes and die. Legislators still control zoning and could simply have more areas to rent and restrict big rental companies from owning too much property ( that keeps prices low). State wide rent controls should prevents shortages. State standards for housing could be enforced, if the fines are bigger than the necessary repairs than they would make those repairs or sell the property. If they are petty and raze the property and hold on to the land the city could tax the land… Governments have a lot of options.
    Love Crash course and not attacking the commentators, but economic theories seem to go unchallenged way too often. Venezuela is a good example of why we should not rely on a single commodity (oil in their case) for economic stability, not sure if price controls matter when the country does not have income. A better example seems to be all the countries with price controls for health care, which sometimes reduces how much healthcare is needed (which is desirable).

    Actually, subsidies targeted only on low-income farmers would allow them to break into the market and create competition. They are great if the market is just getting started, like the mentioned solar panels and are great for breaking monopolies.

    The negative effect of agricultural subsidies only occur in rich countries. Here in the Philippines, the farming industry could almost die if the government won't subsidies them.

    What about producing more and destroying half of what you produce
    This was done in farming in the Thirty's to keep produce prices up

    Crash Course – double check where you have the DWL at the 3 minute mark. You can't have DWL where there wasn't consumer or producer surplus in the free market previously. You have the base of the triangle being where the shortage was and the tip of the triangle where the eq-price was. The triangle should be the reduction of CS and PS caused by the decreased Q.

    A price floor makes no sense. If we do not want to buy this thing at this price, then it makes no difference whether the government or the producers put that price.
    Look:
    If I want to buy chicken if its price was 4 $.
    Then, if producers increase price to 5 $ I won't buy it. If the government suggests the price increasing to 5 $ I won't buy it either. What is the point?

    Farmers make more than the average income? I grew up on a farm. My dad makes as much money as farmers did in the 70s. Thanks Reagan.

    How about a floor BELOW the equilibrium price or a ceiling ABOVE the equilibrium price? What would happen then (theoretically)?

    There is a notable exception minimum wage.

    I disagree. Minimum wage forces businesses- that would naturally pay little due to the low skill nature of the job – to hire over skilled people for no other reason than "muh morality". And if the US enacts a $15 minimum wage. The majority of workers will be fired, hours will be cut and prices will rise. It also has the potential to cut teens out of the low skill work place almost entirely and further incentivize these businesses to further automat their business as much as possible to cut cost even further. Businesses survive on profit not morality points.

    I farm 3,000 acres of crops and raise 4,000 head of cattle and I hate farm subsidies. I have neighbors that get hundreds of thousands every year from the government. Nothing wrong with crop insurance but it also should not be subsidized so that you are not inflating land prices

    "The amount of gas society wants is where supply meets demand". 2:57 Not so. I have often wanted MORE (demand) than what was available (supply). What's described is supply being equal to USE. And subsidies have ZERO effect on the economy. Why? Because it's nothing more than the bill being paid by someone else.

    3:45 Rent Control WRONG!

    Rent control fights real estate fraud where the same apartment units get sold over and over and over and over again, which cause tenants rents to rise (due to negative equity), but ZERO improvements in the property or value added. Plus "discouraged construction" has nothing to do with rent control because this is about existing units being sold as abused assets.

    Farmers Subsidies WRONG!

    Conveniently leaving out a BRUTAL yet MANDATORY economic term here called EXTERNALITIES. Unchecked external disruptions to the market = market failure. This is why there is subsidies to begin with!

    The argument for rent control (and other price ceilings on items that are a basic human need – food, water, shelter) is that the demand curve is nothing close to a slope. The demand curve in its purest sense for housing is a vertical line, with any true slope being leisure housing – holiday homes etc. Every human needs somewhere to live. The only curve is on the quality of housing — one person can live in half of a 2 bed flat, or have a mansion to themselves.

    Rental ceilings tend to apply only to specific home types. Modest homes, it makes sense to keep a price ceiling. As a society, it's deeply wrong that there should be any income level where it is impossible to buy a basic warm roof over your head. Humanitarian philosophy argues that even someone out of work (either out of the employment marker, such as disabled, or the frictional unemployed between jobs) should be able to receive basic shelter.

    The argument is that any product a person could die without access to, is dangerous when exposed to an unregulated free market. When you option is pay or die, market pressures will drive a person to sacrifice absolutely everything else for that need. Housing, medical care, food, water. These things are insulated from the usual freemarket factors, by exploiting the absolute need of the consumer. The closer the demand curve gets to zero, the more regulation that industry needs to remain ethical – if you can make 50% of your consumers pay 25% more, while 5% of your potential consumers die from lack of access to your services, fiduciary responsibility demands you do so.

    The intricate hoops people jump through to try and justify how the "economy" is not subordinate to agricultural output…

    Thanks for this video! It’s an economics course for idiots, I didn’t go to college but if I did I probably wouldn’t have listened anyways, when you get older you find this information to be valuable!

    Leaving a market alone with bare minimum regulations would be ideal and preferred, but in managed/subsidized markets, subsidy and price controls have to be in place, otherwise, subsidy completely distorts available consumer funds or supplier production, which can either cause prices to skyrocket, or bottom out.

    Surely the market produces its own floors and ceiling naturally, such as when it becomes costly to produce corn and the increased price leads to consumers switching to rice.

    Renewable subsidies have worked though, renewables are now on a path, and in some instances probably already is, cheaper than for instance coal. But some renewable subsidies are wrong, like guaranteed income subsidies removes incentives for innovation. Subsidies should instead be targeted towards RnD, like matching dollar-by-dollar in RnD investment and raising demand through state capitalism, like setting up renewable investment funds that partner with the private sector (including crowd investments, which we see too little of) to invest in new installations, technology start ups and give low interest loans for the expansion of existing business.

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