- [Instructor] What we're going to talk about
in this video is the effect of price controls
on changing how the surplus,
the total surplus is reallocated between
consumers and producers.
And we already touch on this in other videos.
The video on rent control.
The video on minimum wages.
And so this is to make sure that we are
taking away some of the big ideas.
So, right over here I have my classic
demand and supply curves.
Of course, the rental market.
At a high price
the quantity demanded is low.
The quantity that people would be willing
to supply is quite high.
And at a low price, the quantity
that people would be willing to supply
is low, while the quantity demanded
would be quite high.
And we've seen from many videos so far
in our journey through economics
that we have our equilibrium price
and our equilibrium quantity
where these two curves, or lines intersect.
So, I'll call this Q sub zero
and this is price sub zero.
But let's say for whatever reason
city officials in this city
where this rental market
that this chart describes the rental market for
they decide that P sub zero is too high
that their owners are complaining that rent
are too high in the market.
And so the city decides to put in a price control.
And in this case, they try to implement a price ceiling.
So they say, look, the price of rent
per square foot per month
cannot go above this level
right over here.
So this is the price
ceiling.
Price ceiling, right over there.
Now, what's going to happen here?
Well, if this is the price ceiling,
then right over here, this is
the total amount of square footage
the quantity of
I guess, square footage
that is being willing that people are willing
to supply that.
The landlords, or building owners
are willing to supply.
But at this price,
you have a much higher quantity
that is being demanded.
This is right over here is the quantity demanded.
And when the quantity demanded at a price
is higher than the quantity supplied
well, then you have a shortage.
Put this right over here.
Is describing
a
shortage.
And we talk about that in other videos.
But let's think about what's happening
to the total surplus.
So when we let the market just get to an
equilibrium price and quantity
the total surplus, actually let me just
draw separately the consumer
and the producer surplus.
So this was the consumer surplus.
Right over here.
Before the government intervention.
And then, this is the producer surplus.
And we've talked about this is other videos.
But now what happens
when we have this price control?
Well, this is the quantity supply.
Now, all of a sudden,
the total surplus shrinks.
The total surplus is now being depicted
by this white trapezoid.
And also, think about how things have shifted.
So one thing that you see clearly,
what is the producer surplus now?
The producer surplus is
only this little yellow
triangle, or this little.
I don't know my colors.
This little blue triangle at the bottom.
So you see very clearly
that all producers suffer here.
All producers
all producers suffer.
Now you might say, well, of course
this is a rent control.
But surely, the consumers will benefit here.
Well, it isn't the case, it is the case that
some consumers, the ones that are able to
get into a unit, they might benefit.
So this right over here, some
demanders, or you can say
some consumers
consumers
benefit.
But, not all of the consumers benefit.
In fact, you have a shortage now.
Before you had more people who were able
to get housing.
Now these folks are not going to get housing.
And, as in all of economics you should take
a grain of salt
in any type of
oversimplified model like this.
Or simplified, this is actually
a very useful model
for thinking about certain things.
Because, even these consumers that are benefiting
according to this model
for these consumers it looks like their surplus
has grown, or if you're this kind of marginal
renter right over here,
let me draw it over here.
If you are the marginal renter
that was before, getting
this much benefit.
Now you're able to get that plus all of that.
But think about the things that this model
is not capturing.
What's the incentive for the landlord now?
Would they want to invest in the building as much?
Would they
would they maybe let the building
kind of suffer a little bit?
And there's also particular quirks
for how rent control is implemented
that might also change behavior.
So always keep in mind
what's not captured by the model.
But in broad brush terms
you put in a price control, in this case,
you put in a price ceiling
you're going to create a shortage.
All the producers are going to suffer.
Some of the consumers
benefit, according to this model.
But not all of them.
Because not all of them are now going to be able
to get a place to rent.
Now let's move over to another market.
Let's say the corn market.
And let's say
once again
we have our equilibrium price
and our equilibrium quantity.
So price of equilibrium.
And this is our
quantity sub equilibrium.
But let's say in this situation the government
let's say the farmer, the corn farmers
are able to organize.
And they're able to lobby the government and say,
hey, we really suffer
when there's low corn prices.
So where we want to institute a price control
we want you to institute a price control.
We want a price war.
So the government says, okay corn farmers
you seem to be pretty serious about it
so we are going to institute a price floor.
So the price cannot go
below this level.
So this is a price floor.
Well, what's going to happen now?
Well let's think about the quantity
demanded, and the quantity supplied.
So that, right over there,
is the quantity demanded.
You see where the price intersects the demand curve.
And this right over here is a quantity supply
where we intersect in the supply curve.
Quantity supply.
So in this situation
your demand is less
the quantity demanded
is less than the quantity supplied.
So in this case,
you have a surplus.
The farmers would want to produce more
than people would want
at that price.
And also think about what happens to
this total surplus.
And in particular, the consumer and the producer surpluses.
So in the old world
this was
the consumer surplus.
And,
this right over here is
the producer surplus.
In the new world, the total surplus shrinks
the sum of the two.
We're now talking about
this, the area of this trapezoid.
Right over here, this sideways trapezoid.
And you see that all consumers suffer
because now the consumers surplus
has been shrunk right over
the consumer surpluses right over here.
There's consumers who are now not even consuming corn.
And even the ones that are consuming corn
before, let's say this marginal consumer
right over here was getting all of this benefit.
Now, they are getting a smaller benefit.
So we could say, all
all consumers
suffer.
Now what about the producers?
Well, the producers who are able to
sell their corn
definitely get a benefit.
So if you were this marginal producer
right over here
your surplus
right over here
would have been like that.
But now you get even a higher price for it.
And so, one way to think about it
is, some producers,
some producers for sure, benefit
according to this model.
So let me write that.
So, some
producers
producers benefit.
But it's important to realize, once again,
that not all of the producers benefit.
Because once again, we have a surplus.
If it's implemented this way
well, you might have a lot of farmers
who aren't even able to
sell their corn
at that price.
So it's an interesting thing to think about.
You should always take models with a grain of salt.
But it is a pretty interesting framework
where governments often will try to do
some type of knee jerk solution
to try to make something look good,
or feel good to their constituents.
But the end effect is that people might
suffer more than they expect.
They might cause a shortage when you put
a price ceiling.
Or, it might cause a surplus
when you have a price floor