Econ: What are Price and Quantity Controls?

FinanceEcon
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Transcript

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incentivized to produce less quantity at higher prices you know

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than they would if they had some competition Well in

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cases like these the government can step in to try

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to correct the market making it more efficient by setting

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price and quantity controls In other cases the government may

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set price and quantity controls in response to social issues

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and actually creating market distortion rather than a correcting one

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So how do price and quantity controls work If you

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look at your typical supply and demand graph like this

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take a look at the axes on the X axis

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We've got quantity on the Y axis We've got price

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Since the X axis and a Y axis are price

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and quantity on the graph well those are the two

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things the government has to play with to affect the

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markets No excess demand or supply means we're at equilibrium

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where supply and demand cross like right there This means

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the supply a good or service is sold at matches

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the same supply demand it all for an agreed upon

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price by buyers and sellers What market inefficiencies produce what's

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called a dead weight loss which we can see on

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the graph right there representing the cost of inefficiency When

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there's either excess supply or excess demand while we Khun

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see dead weight loss the larger the deadweight loss triangle

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on the graph while the farther away from equilibrium The

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market is when there's excess demand That means there's a

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shortage of supply when lots of people want a limited

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quantity of stuff while prices skyrocket On the flip side

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when there's excess supply demand shrinks When there's an abundance

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of something compared to you know how much of it

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people want Well prices fall sometimes Government price in quantity

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controls are designed to reduce deadweight loss and other times

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these controls create deadweight loss First up price controls A

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government can set a price control basically setting price limitations

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on firms in a certain market Well there's two main

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types of price controls Price ceilings and price floors Well

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price ceilings mean there's an upper limit on how much

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affirm Khun Selig odor service for For instance a government

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might set a price ceiling on something that everyone needs

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to keep you know affordable like food for natural monopolies

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that affect a lot of society like utilities Internet service

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providers and buses that buses Will governments oftentimes set a

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price ceiling Will these air all natural monopolies since their

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monopolies that happened spontaneously from very high fixed startup costs

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Price ceilings on natural monopolies like these insure businesses aren't

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taking too much advantage of their monopoly status and overcharging

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consumers on those evil business is rent controlled areas are

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another example of price ceilings However rent controlled areas are

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more likely creating a dead weight loss Ten Getting rid

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of one but artificially lowering the cost of housing that

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creates excess demand Rent control Lower supply to since that

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means landlords and rent controlled areas will be feeling the

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squeeze of the price ceiling Why be a landlord in

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an area where prices are kept artificially low Hello rent

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control when you could be a landlord in an unregulated

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red state area with much higher rent prices in therefore

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profits These landlords and rent controlled areas who are making

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less money because of government intervention are then incentivized to

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provide housing with you know worst quality Another reason government

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might set a price ceiling is to prevent hyper inflation

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which history has told us happens often during war time

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Right Well price floors are the opposite you know when

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a government sets a lower bound on price for firms

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While price ceilings often help consumers price floors often help

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producers For instance governments sometimes help farmers out by setting

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price floors on things like milk By setting the price

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artificially high though this can create reduced a man and

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excess supply usually does well In the case of farmers

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governments usually set price floors along with the promise of

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buying up any excess supply from farmers Well why does

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the government bother helping out these farmers and keeping him

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around Technology made farming go from meeting a ton of

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people needing very few people for the same output of

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food producing on mass farming equipment fancy fertilizers and pesticides

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Ball radically transformed the farming industry Some governments have used

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price floor simply to reduce consumer demand for a good

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for instance making alcohol or tobacco more expensive would ideally

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drive demand for alcohol and tobacco down well in the

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labor market Minimum wages a price floor Here the suppliers

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are workers not the firms Firms are demanding labor and

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workers are supplying it to remember when the price of

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something rises It's usually followed by a drop in demand

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Okay so what about quantity controls Well a quantity control

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is usually referred to as a quota and it limits

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the quantity of a good quotas work well in cases

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when controlling the quantity is easier or more important than

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controlling the cost For instance a government may set a

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quota for nuclear power plants since there's a potentially high

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social cost If you know something went awry and the

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international markets it's common for countries to set import quotas

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So this quota restricts a supply of a certain good

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from international markets so that gives the domestic country a

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leg up against them Foreign competitors like another example of

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quota on imported steel would mean that domestic steel firms

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would get an advantage over imported steel while international quotas

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benefits some domestic firms This comes at the cost of

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everyone buying the goods meaning a steel quota in the

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US would mean higher steel prices from domestic steel producers

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then from cheaper foreign producers in an unregulated market A

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limited number of hunting and fishing licenses and tags are

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another example of quotas in order to keep hunting and

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fishing populations you know in existence the young ones have

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to be given time to be born grow up and

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reproduce right Well oftentimes A combination of quotas and price

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floors in the form of high price licenses and tags

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are used to keep hunted and fished populations at sustainable

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levels Setting a quota a quantity limit has similar effects

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as a price floor Artificially restricting quantity sold means higher

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prices and lower demand compared to free market equilibrium Well

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if you were wondering it's not too common when a

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capitalistic government sets a quantity minimum or floor But if

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they did in theory it'd create a surplus of supply

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compared to equilibrium levels and potentially would need to be

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supported by the government like price floors on agriculture to

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make up for the lack of demand Well for instance

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let's say in the future the government created an enforceable

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law on the labor market making firms hire a minimum

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number of people in response to shrinking jobs Yes Hello

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Robots They're coming for our jobs Firms would then be

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forced to hire people when they wouldn't want or need

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thio creating forced oversupply of workers on two firms Well

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all this government regulation can breathe rebellion rebellion in the

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form of the underground economy the market free of any

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government regulations And yes black market milk is a thing 00:07:15.992 --> [endTime] just like black market booze Hey