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

So, during times of inflation or deflation, why doesn't the government just set prices? It sounds reasonable, but price ceilings or floors just don't work. Adriene and Jacob explain why. Subsidies, however, are a little different, and sometimes they even work. We'll also explain that. Today you'll learn about stuff like price controls, deadweight loss, subsidies, and efficiency.

Thanks to the following Patrons for their generous monthly contributions that help keep Crash Course free for everyone forever:

Mark, Eric Kitchen, Jessica Wode, Jeffrey Thompson, Steve Marshall, Moritz Schmidt, Robert Kunz, Tim Curwick, Jason A Saslow, SR Foxley, Elliot Beter, Jacob Ash, Christian, Jan Schmid, Jirat, Christy Huddleston, Daniel Baulig, Chris Peters, Anna-Ester Volozh, Ian Dundore, Caleb Weeks

--

Want to find Crash Course elsewhere on the internet?

[AhmedNaseer]

Some key takeaways:

1. President Richard Nixon, 1970s, 90-day price and wage freeze to fight inflation. Milton Friedman, 'One of those plausible schemes with very pleasing commencement that have shameful conclusions'.
2. Price ceiling - Maximum price for a specific good or service
3. Price floor - Minimum price in a specific market. Keeping price artificially high and not allowing price to fall to equilibrium.
4. In terms of helping consumers and producers, price controls are counter-productive. However minimum wage is a better solution.
5. Economists generally agree that rent control results in reduced quantity and quality of housing that is available.

6. A subsidy is a government payment given to individuals, organizations or businesses to offset costs to advance a specific public goal.

[jonas]

Subsidies (especially farming subsidies) have another negative aspect. Let's look at Burkina Faso. One time, Burkina Faso was leading the world's cotton production. The price was low, the quality was great. Naturally, their cotton was bought. US cotton farmers were not able to produce cotton as good as the cotton from Burkina Faso. So they called for subsidies and they got subsidies. That distorted the market: US cotton was far more cheaper and the Burkina Faso cotton was not bought anymore. The Burkina Faso cotton industry got destroyed even when they made better cotton. Burkina Faso was in the WTO and the WTO ruled, that the US subsidies were illegal but that was no problem for the US.

So: Subsidies have the ability to destroy developing markets.

[bassk]

"Deadweight isn't just a good description of your ex" 😂

[tamannas]

I always love crash course lessons, and they are very well rounded for the most part, which is why I feel I should point out something that I felt missing in this video. In the context of developed countries, especially the US, it may be true that farmers are well-off and gov. subsidies may not be required. But it should be pointed out that this is definitely not the general case. I think, in most developed countries, farmers are not rich and aren't well protected by the government. In fact, in a country like India, with a population of almost 1.3 billion, we are heavily dependent on our very few numbers of farmers to provide for such a big number of people. On top of this huge demand, most farmers here are not highly educated (a consequence of many factors), and are therefore not able to upgrade to the latest techniques or don't know how to deal with situations such as water shortages which leads to crop failure and shortage of supply. They don't how to deal with their crops getting infected, or properly treat and take care of their soil. So without government intervention, our farmers would be at a loss :(

[obviouslyblack]

"physicists ... they have unbreakable laws and perfectly controlled experiments"
*Laughs in failed graduate research experiments*

[.a]

You know, it felt like you weren't explaining "subsidies" as much as you were explaining "agricultural subsidies in the United States".

[DavidWilliamsaz]

New Zealand removed agricultural subsidies and the value of farms and the farm output increased.

[akositatot]

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

[fidmarcano]

As a venezuelan, I can confirm this video. Price controls and a limited amount of dollars a person can buy, have destroyed the economy.

[RapiBurrito]

It's quite sad that my country, Venezuela, is only mentioned to talk about how badly we fucked it up. And yes, it's worse than they said. For reference: an iPad mini is around 30 months worth of work at around minimum wage.

[vectoredthrust]

The takeaway is: The real world is complicated and doesn't perfectly obey simplified models in textbooks. While price floors, ceilings and subsidies are usually a bad idea, occasionally they aren't.

[ShawnRavenfire]

I remember my high school economics teacher telling us about when he was a kid, he and his friends had a farm that they got just for collecting subsidies not to plant anything.

[mathiassigneben]

What is good for the economy is not always what is good for the people.

[MrNickyj]

Taking me back to my AP Microeconomics class days. Never thought I'd miss graphs so much!!

[rohitrai]

What if price controls are used to cap the prices of goods which have artificially high prices. Like pharmaceuticals which sell on 2000% profits.
Their demand hardly goes down so market can't bob the price.

[ssandok]

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.

[FieldMarshalFry]

however not having price ceilings on rent means that people can no longer afford to live in certain areas, look at London, housing there is massively overpriced, because the government refuse to build, preferring to leave it to the market which does not build many houses as it makes a greater profit building a handful and selling them at extortionate prices

[jac-attack]

I disagree that they assert that all economists don't agree with subsidies and market loans. I am an Ag economists and my university is responsible for much of the research and writing of Ag policy for things such as the Farm Bill. They recognize problems and have to identify the needs of producers and the market.
The biggest hurdle is that Americans expect a constant supply of goods. If a catastrophic event such as drought or rain wipes out a farmers crop, many often wouldn't have the resources to plant another year, or they might stop production. Crop insurance and loan rates are meant to protect the supply of agricultural goods.
So I disagree that all market controls are bad and they say that too with the minimum wage. My experience with non-ag economists has shown that they don't fully understand or encompass the entire Ag industry when they make assertions. But this is why it's such a huge field of study.

[FangMuffin]

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.

[davidalearmonth]

I always figured that Rent Controls would help protect people from potentially Unreasonable price increases on the places they are currently living, since it is difficult and expensive to have to uproot yourself yearly. So it is a protection against unethical landlords. Kind of gets into something of a Monopoly type of situation, or at least similar.

The other issue is that what if your only employment is in NYC, but then you can't afford to live there due to price increases? I have friends in Toronto who find that the city is the only place where there is sufficient population to support their type of work, even though the businesses are still unwilling to pay a wage appropriate to actually living in Toronto. But people are desperate, so they just scrape by.