Price Floors: Airline Fares

In this video, we cover how price floors lead to wasteful increases in quality and a misallocation of resources. Using the real-world example of airline regulations from 1938-1978, we show how price floors can be used to restrict entry and reduce competition within an industry. When the Civil Aeronautics Board regulated airline fares, airlines couldn’t compete on price so they instead had to compete by increasing quality. This may sound like a good thing, but we’ll show how this actually created quality waste since the cost of that quality was higher than the value to the customers. Price floors also lead to the misallocation of resources by preventing competition and responsiveness to consumer demand. In this video, we’ll show you how consumers are negatively affected by price floors.

00:00 Price floors
00:41 Wasteful increases in quality – airline fares example
02:18 Wasteful increases in quality – model
05:30 Deregulation results
06:57 Misallocation of resources
07:37 Recap

[kaseshib]

How is the benefit to consumers because of increased product quality shown on the graph? And wouldn't the demand curve change because the product is different (e.g. having a piano bar vs not)?

[leonardogarniergmail]

The Spanish subtitles for this video are wrong: they are from the previous video (minimum wages)

[mathlearnerrenraelhtam]

Sir, Why would the flights need to compete for better quality if the quantity supplied is fixed? I mean as people demand exactly the same number of flights that exists at that point of time, no matter how the flights are, would not customers have to use whatever that's available for if not their demand goes unsatisfied?

[arpitgupta]

They were making huge profit as they knew during corona they can't

[alex_zetsu]

I have flown a plane and this guy is false. There absolutely should be a price floor for economy tickets to raise the quality of these damn flights. This would also have the benefit of making fewer planes in the sky. Restrict entry today and force airlines to compete by quality.