♪ [music] ♪
- [man] So far, we've looked at
a number of the consequences of price controls,
both price ceilings and price floors.
And most of the consequences, they're not very good.
Why do governments enact price controls?
We won't be able to cover all of the reasons here,
but let's cover a few of the big ones.
Do you remember how we began this series of lectures?
With President Richard Nixon, imposing wage and price controls
throughout the US economy in August of 1971.
Now again, this was one of the largest peacetime interventions
into the economy ever.
It was a massive policy with
many, many severe and serious consequences,
but I haven't yet told you the rest of the story.
Here's the rest of the story.
In November of 1972,
Nixon won re-election in a landslide.
So, wage and price controls were popular.
Nixon was re-elected with this policy as well as with others.
Now, why is this?
I think in many cases, in a majority of cases,
the public simply did not connect wage and price controls
with their consequences.
So, looking around and the shortages,
the long line-ups for gasoline,
they didn't say the cause of that is the price control.
What did they think the cause was?
Well, if you look at surveys from that time,
what was the cause of shortages?
Well, people would say it's OPEC, it's the Arabs, it's the foreigners,
it's the greedy oil companies.
They're the ones causing the shortage.
In fact, we know that although these might be good explanations
in some sense for high prices,
they're certainly not good explanations for a shortage.
In a free market, we would never see a shortage.
The cause of the shortage was the price control,
but the public didn't see that.
The public did not have the benefit of the great economics education
which you're receiving today.
Moreover, this was not just true for the American public,
but for people around the world.
Let's take another example.
Here's another example of price control on oil.
In 2003, Iraq fixed the price of gasoline
in the country at five cents per gallon.
Great, great, cheap gasoline, right?
Well no, of course, there were shortages and long lines,
just as in the United States during the 1970s.
Indeed, this picture looks like
it might be from the United States in the 1970s,
except perhaps, for this guy back here.
In fact, it is a picture from Iraq.
Now, whom did the Iraqis blame?
Did they blame the price control? No.
In fact, just like the Americans in the 1970s,
they blamed foreigners;
except, this time they blamed the Americans.
They said, well the Americans are shipping all of the oil out.
Of course, the real cause of the shortage was the price control
at five cents per gallon of gasoline.
Now, one might agree with everything we've said here so far
but still have the feeling
that maybe price controls help the poor,
and for some of the poor this is probably true.
Rent controls, for example,
they help people who have rent-controlled apartments,
but they make it more difficult to get an apartment.
There's a real trade-off there.
Moreover, many people with rent-controlled apartments
are not poor.
There are lots of rich people in New York City
who have rent-controlled apartments
and who won't give them up
because they're a great deal.
So rent control is not a very targeted approach
to helping the poor.
Same kind of thing is true about minimum wages.
Minimum wages help workers who keep their jobs
at the higher wage,
but they don't help those who can't find a job
and who are made unemployed by their higher wage.
Again, there's a trade-off.
Perhaps, even taking into account the trade-off,
workers would still like minimum wages
but not everybody is benefited.
Moreover, many people
with minimum wage jobs are not truly poor.
For example, students and young people
often living at home, often with part-time jobs and so forth.
This is not to say that
we don't care about students and young people.
It's simply to say that
the minimum wage is not very targeted.
It doesn't target the poor.
It targets people who have minimum-wage jobs,
and not all of them are poor by any means whatsoever.
Some of them are just young and starting out in the job force.
Moreover, the response here to minimum wages and rent controls
is not necessarily that we shouldn't do anything,
but rather that there may be better ways to help the poor.
Housing vouchers, for example, are targeted to poor people
and allow them to pay more for their rent.
They allow them to buy any apartments any place
and so forth,
but they add to the purchasing power of poor people for their rent.
We've a large housing voucher program
in the United States, and it's been very successful.
Similarly, wage subsidies are maybe a better approach
to helping the poor than is the minimum wage.
We looked at this once before.
Let's very briefly take another look at wage subsidies
versus the minimum wage.
Remember how we analyzed the wage subsidy
by putting the subsidy wage into the diagram
and finding that the wage subsidy increases the wage received
by workers at the same time as it reduces the wage paid by firms.
The difference being made up by the subsidy.
One of the things about the wage subsidy,
of course, it costs the tax payers when a minimum wage does not.
But notice that the wage subsidy increases employment to QS.
On the other hand, a minimum wage at the same wage of $12
as happens with the wage subsidy,
well that actually reduces employment to QD.
So there may be better ways
of helping the poor than price controls.
Economists believe not that we shouldn't help the poor,
but rather that we should try and do it in a way
which is consistent with markets, that works alongside markets,
rather than trying to override markets,
which often leads to unintended and negative consequences.
If you want to test yourself click "Practice Questions"
or if you're ready to move on just click "Next Video."
♪ [music] ♪