Price Controls, Subsidies, and the Risks of Good Intentions: Crash Course Economics #20
video description
Date: 2022-04-04
Related videos
Comments and reviews: 10
crucian_carp
Price Controls, Subsidies, and the Risks of Good Intentions
- Early 1970s, Nixon established a 90 day price and wage freeze (purposed to deter inflation) to the dismay of economists
- -One of those plausible schemes with pleasing commencements, [that] have often shameful and lamentable conclusions. -
- Price control
- Price ceiling - when the government sets a maximum price for a specific good or service (producers no longer find production profitable due to cheap prices and thus the lower price will decrease the amount of product produced - a shortage)
- Rent control
- Idea is to increase affordability for tenants, which enables long-term tenants to stay in their homes when real estate prices rise
- Lower rent discourages renovation and new construction, reducing quantity supplied
- Result is a shortage of apartments with landlords that have few incentives to maintain their buildings and be responsible to tenants 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
- Price floor - a law that sets a minimum price in a specific market
- Keeping the price artificially high and not allowing it to fall down to equilibrium
- Higher price would give producers an incentive to produce more, but, at that high price, consumers are instead encouraged to opt for substitutes
- Argument for price floor - if producers cannot get a high enough price, they-ll stop producing and, in the case of essential products, we will run out of food and suffer
- 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 amount of gas society wants is where supply meets demand. Producing any quantity less than that will result in deadweight loss.
- The quantity produced at the price ceiling is not allocatively efficient
- As long as it is below the equilibrium price, the lower the price ceiling, the lower the deadweight loss and inefficiency
- Subsidy - a government payment given to individuals organisations or businesses designed to offset costs to advance a specific public goal
- While these maintain the market at equilibrium with no shortage or surplus, stable living, limited food price inflation, and encouragement of stable food supplies, many farmers are not poor (and are argued by economists to have the income they need to handle price shocks, and may discourage farmers from innovating (over reliance) as they have guaranteed income from the government
- A survey of economists found that 85% think the US should eliminate agricultural subsidies
- Economists recognise that market prices are set for a reason
- If corn prices decrease because of decreased demand, it is inefficient and wasteful to spend money on subsidies
- If there is a natural disaster affecting farmers then short-term aid may be required - but this is not the reality of farm subsidies
- In the US, agricultural subsidies have been around since the Great Depression. They were meant to help prop up farm prices and farmers.
- Direct payments - basically government grants handed out to farmers based on land ownership and historical production levels
- In the US - received regardless of the market price for crops or production rates (proved inefficient and eliminated in 2014)
- A large portion of US agricultural subsidies go to crop insurance
- Some economists argue any form of government interference distorts the market, resulting in unintended consequences
- Crop insurance guarantees farmers and income and could encourage them to take more risks (planting on less fertile land)
- If demand is greater than production, the result is a deadweight loss (underproduction of this product. A subsidy would aid society and improve efficiency
- Govt subsidies in research and development in energy stave underproduction
- Some economists argue for this reason, deadweight loss is reduced
- Other economists argue businesses already have an incentive to innovate and that subsidies create false demand and that there is no deadweight loss (and even if there is, markets will adjust)
- In conclusion, subsidies aren-t inherently good or bad and depend on societal and and market values
reply
Price Controls, Subsidies, and the Risks of Good Intentions
- Early 1970s, Nixon established a 90 day price and wage freeze (purposed to deter inflation) to the dismay of economists
- -One of those plausible schemes with pleasing commencements, [that] have often shameful and lamentable conclusions. -
- Price control
- Price ceiling - when the government sets a maximum price for a specific good or service (producers no longer find production profitable due to cheap prices and thus the lower price will decrease the amount of product produced - a shortage)
- Rent control
- Idea is to increase affordability for tenants, which enables long-term tenants to stay in their homes when real estate prices rise
- Lower rent discourages renovation and new construction, reducing quantity supplied
- Result is a shortage of apartments with landlords that have few incentives to maintain their buildings and be responsible to tenants 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
- Price floor - a law that sets a minimum price in a specific market
- Keeping the price artificially high and not allowing it to fall down to equilibrium
- Higher price would give producers an incentive to produce more, but, at that high price, consumers are instead encouraged to opt for substitutes
- Argument for price floor - if producers cannot get a high enough price, they-ll stop producing and, in the case of essential products, we will run out of food and suffer
- 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 amount of gas society wants is where supply meets demand. Producing any quantity less than that will result in deadweight loss.
- The quantity produced at the price ceiling is not allocatively efficient
- As long as it is below the equilibrium price, the lower the price ceiling, the lower the deadweight loss and inefficiency
- Subsidy - a government payment given to individuals organisations or businesses designed to offset costs to advance a specific public goal
- While these maintain the market at equilibrium with no shortage or surplus, stable living, limited food price inflation, and encouragement of stable food supplies, many farmers are not poor (and are argued by economists to have the income they need to handle price shocks, and may discourage farmers from innovating (over reliance) as they have guaranteed income from the government
- A survey of economists found that 85% think the US should eliminate agricultural subsidies
- Economists recognise that market prices are set for a reason
- If corn prices decrease because of decreased demand, it is inefficient and wasteful to spend money on subsidies
- If there is a natural disaster affecting farmers then short-term aid may be required - but this is not the reality of farm subsidies
- In the US, agricultural subsidies have been around since the Great Depression. They were meant to help prop up farm prices and farmers.
- Direct payments - basically government grants handed out to farmers based on land ownership and historical production levels
- In the US - received regardless of the market price for crops or production rates (proved inefficient and eliminated in 2014)
- A large portion of US agricultural subsidies go to crop insurance
- Some economists argue any form of government interference distorts the market, resulting in unintended consequences
- Crop insurance guarantees farmers and income and could encourage them to take more risks (planting on less fertile land)
- If demand is greater than production, the result is a deadweight loss (underproduction of this product. A subsidy would aid society and improve efficiency
- Govt subsidies in research and development in energy stave underproduction
- Some economists argue for this reason, deadweight loss is reduced
- Other economists argue businesses already have an incentive to innovate and that subsidies create false demand and that there is no deadweight loss (and even if there is, markets will adjust)
- In conclusion, subsidies aren-t inherently good or bad and depend on societal and and market values
reply
Fang
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.
reply
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.
reply
Tamanna
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: (
reply
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: (
reply
SecondLifeDesigner
They totally neglect price gouging. Without any government limits and regulations goods and services that are the necessities of life corporations tend to gouge the public. We see this in healthcare insurance prices, higher education and housing costs. Funny how the one thing they bring up time and time again as examples is food production. Have you noticed that food generally is pretty inexpensive. There is a balance point and that point is where the good of the people and the greed of the corporations and held in check to allow everyone to thrive. Yes you can't set the price of gas too low so that it is below the cost it takes to make it. You can't set the price too high to satisfy the greed of the corporations because then the public will suffer. A completely free market with no limitation set by the government only serves the needs and wants of the corporations and CEOs and and not the people.
reply
They totally neglect price gouging. Without any government limits and regulations goods and services that are the necessities of life corporations tend to gouge the public. We see this in healthcare insurance prices, higher education and housing costs. Funny how the one thing they bring up time and time again as examples is food production. Have you noticed that food generally is pretty inexpensive. There is a balance point and that point is where the good of the people and the greed of the corporations and held in check to allow everyone to thrive. Yes you can't set the price of gas too low so that it is below the cost it takes to make it. You can't set the price too high to satisfy the greed of the corporations because then the public will suffer. A completely free market with no limitation set by the government only serves the needs and wants of the corporations and CEOs and and not the people.
reply
Ahmed
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.
reply
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.
reply
Amici
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.
reply
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.
reply
Will
Question: What about Price Controls for public services, e. g. Education, Transport, Health Care and others?
The intention has been to keep these public services accessible to most other people, but because it is the government who provides these services (most of the time, the government could ensure there are enough services/products being produced through its other sources of funding, i. e. taxes. These would cause government financial deficit in specific sectors sometimes but I think the arguments against/for price controls are slightly different?
reply
Question: What about Price Controls for public services, e. g. Education, Transport, Health Care and others?
The intention has been to keep these public services accessible to most other people, but because it is the government who provides these services (most of the time, the government could ensure there are enough services/products being produced through its other sources of funding, i. e. taxes. These would cause government financial deficit in specific sectors sometimes but I think the arguments against/for price controls are slightly different?
reply
wasabio
These are so interesting, engaging and entertaining: D i've watched 20 of these in 2 days (i'm planning to watch all 35 by the end of the day n. n ) i'm interested in economy and these make it easier for me to take information in and then research key points more in depth since my focus and attention span isn't all that great. Yet the way this is paced, presented and explained makes it fun to watch one after another: ) Great content, props to both of you!
reply
These are so interesting, engaging and entertaining: D i've watched 20 of these in 2 days (i'm planning to watch all 35 by the end of the day n. n ) i'm interested in economy and these make it easier for me to take information in and then research key points more in depth since my focus and attention span isn't all that great. Yet the way this is paced, presented and explained makes it fun to watch one after another: ) Great content, props to both of you!
reply
Dark
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.
reply
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.
reply
vanshika
This might be a silly question but if the prices are set really low by a price ceiling, won't producers think to produce more because now many people will be buying it? Why there would be a shortage if producers can make up for it by an increased number of buyers at low prices?
reply
This might be a silly question but if the prices are set really low by a price ceiling, won't producers think to produce more because now many people will be buying it? Why there would be a shortage if producers can make up for it by an increased number of buyers at low prices?
reply
Add a review, comment
Other channel videos
