all right so in this video we are going to look at the inefficiency of a price control okay so we were talked about economic surplus how that's the the sum of consumer and producer surplus so now we're going to look at a market with a price control and see what happens to economic surplus okay so here's the market for apartments that we explored earlier this is the one from the um the first uh price ceiling lecture so it was 1250 was our equilibrium and now we see our consumer and producer surplus in that uh framework um sorry um and now we'll see what happens when there's that the the price ceiling so remember in this example we said what happens when we there's a price ceiling of a thousand dollars and we discovered that there was a shortage of apartments but now we're going to look at that from an efficiency standpoint okay so the first thing we want to look at is what happens to consumer surplus so it's the price ceiling is now is that a thousand dollars and so what this changes as if you're calling let me just do some annotations on here so if we recall what this does is this is the new quantity supplied sorry where did my pen go okay this is the quantity supplied that's not the right place sorry do that this is the quantity supplied where that price ceiling a thousand dollars which is the new price of apartments where it hits the supply curve this is the new quantity demanded okay so you have 30 000 people looking for apartments only 20 000 for rent so that means 20 000 are being rented okay doesn't matter how many people are looking for apartments only 20 000 are for sale so this is my new quantity uh quantity of apartments and a thousand dollars of course is the new price so how do we measure consumer surplus we measure it the same way so remember how we did this before so let me put in my old price here of 1250 okay and we measure consumer surplus the same way so if you're the person who is willing to pay two thousand dollars for an apartment you were previously getting two thousand down to twelve fifty seven hundred fifty dollars worth of surplus now you're getting a thousand dollars worth of surplus if you're the person willing to pay 1500 for an apartment you used to be getting 250 dollars full of surplus now you're getting 500 worth of surplus so for everybody who gets an apartment the surplus just increases so for everyone here the surplus increases okay so that is part of what happens to consumer surplus when there's a price ceiling the price goes down consumer surplus goes up for everyone who gets an apartment but there's also and we can't ignore this the 5 000 fewer apartments being rented so that's this little triangle here this little triangle used to be part of consumer surplus it's not anymore why because remember how we measure consumer surplus it's the difference between the willingness to pay and the price actually paid but you only get surplus if you rent an apartment if you're left without an apartment which there's 5 000 people in this case who don't have an apartment there's no surplus to be had your surplus is zero because you don't get anything okay so when we look at the overall effect we see that consumer surplus went up by this amount for everybody who got an apartment and it went down by this amount because uh there is a fewer apartments for rent so overall consumer surplus increased so overall this increases the welfare for consumers consumers are better off as a group with the price ceiling okay so it's a little that's a little strange i always i ask this question a lot in homeworks and i say would this rent control help or harm renters in the city and a lot of people immediately say well it hurts them because there's fewer apartments for rent and that's not incorrect but if we look at consumers as a group and we want to measure as a group our consumer is better or worse off we have one tool to measure how well off consumers are as a group that's consumer surplus and what we see as consumer surplus has increased so as an entity if we say how are consumers doing we would say consumers are better off okay does that mean every single consumer is better off absolutely not what we find is everybody who gets the apartment is better off but there are several people who end up without apartments okay who have to go live outside of town or live with family or something like that so that's that would be our our conclusion here as a group as an entity if we have to think of consumers as a as a unit they're better off but if we ask is every single individual consumer better off the answer is no some consumers are worse off okay now let's see what happens to producer surplus okay so again in our old price and quantity right there we would have measured producer surplus by going up from the supply curve to the price and so this triangle would measure producer surplus okay now with the new price we still go up from the supply curve to the price but notice it's lower the price is in 1250 it's now a thousand so for every apartment sold the producer surplus goes down which makes sense because the profit has gone down and on top of that you also have lost some surplus because there are some partners not for rent so as a whole the producer surplus shrinks shrinked shrunk from this bigger triangle to the smaller triangle producer surplus has gone down as a result of the price ceiling okay so the price ceiling increases consumer surplus but reduces producer surplus okay so now let's compare the two before and after the price ceiling as a whole comparing them we see that economic surplus has been reduced economic surplus used to be this entire area in between the supply curve the demand curve what the price ceiling does is the surprise ceiling converts some of the producer surplus over to consumers but some of the producer surplus just gets lost so remember my analogy of the pizza from the beginning of these videos that's what a price ceiling does this is the version i know it looks equitable here but you have to imagine that renters and and and uh and landlords might not always be equitable but the idea here is this is maximized consumer surplus gets theirs producer surplus gets theirs if the government decides that things are not fair and apartments are too expensive for consumers and landlords can afford to give up a little bit of their surplus because they're making so much money you get a scenario like this now the little brother gets more pizza the bigger brother gets less pizza but there's some pizza in the trash remember that was the analogy okay so we call this area here we call it dead weight loss or deadweight welfare loss so deadweight loss is the reduction in efficiency the reduction in economic surplus as a result of an inefficient market in this case it's the government intervention the price control that creates the inefficiency so in general this is going to be our result when you have a free market that is behaving with supply and demand the efficiency will be maximized you're going to have an efficient market in that when supply and demand does its own thing the invisible hand declares the price if the government changes the price inefficiencies will result okay here's a caveat that is only true in markets where that don't experience what's called market failure okay so we learn a little bit about that later and what we learn is there are places where the government should institute some impact whether it's a price control or some other intervention that's different but those are things like monopoly when there's not enough competition or things when there's like pollution or in things like public goods where the when you have something like uh the post office where the private market isn't gonna produce isn't gonna develop enough of this uh enough of the resource and the government decides that the resource needs to be developed you know so people in rural areas get postal services and things like that so that's what we're going to learn later is we're going to learn that this is our our starting point in general the free market is the most efficient outcome government innovation creates inefficiencies it can it can help in inequities remember that's the trade-off inequities can be fixed by government intervention but it will create inefficiencies uh unless some conditions are met and then we'll learn later the conditions that can be met uh that create the situation where the government actually can protect against inefficiencies not create them um okay so uh sorry i just wanna skip ahead to the next slide so you can see deadweight loss drawn uh drawn out uh and then there's the last slide explains another way to think about inefficiency um and i'm going to to show it on the graph um you can read this in your own but this is wordy i want to show what i mean here um and so i am going to think about our depth one of our ways of describing uh an inefficient market okay when markets are efficient there are is no way to help somebody without hurting someone else okay that that is one of our definitions of efficiency when welfare's maximize so if it's truly maximized you can't make consumers better without hurting producers or vice versa you can't make producers better without hurting consumers okay when welfare is maximized that is not the case in this inefficient market and i can prove it okay so the proof is right here so in this market at a limit of a thousand dollars we're going to say that there are 20 000 apartments rented okay so what about the 20 thousand and first apartment or the twenty for one thousandth apartment whatever you wanna say what the supply curve is telling me here is that there's someone willing to rent their apartment but to rent their apartment they need to get eleven hundred dollars it just doesn't make sense for them to rent the apartment for a thousand dollars but eleven hundred dollars they'd say sure there's someone here willing to pay fourteen hundred dollars for an apartment okay in a free market they would be able to find each other and make a deal okay if they were able to agree at say twelve hundred fifty dollars this person would be happy this person would be happy this person would be selling his apartment for a higher profit than he needed this person would be able to rent an apartment at a lower price than they needed they would both be happy but the government says that's illegal the government says you can't do it cause a thousand dollars the maximum so there is a trade out there a mutually beneficial trade that would make a producer happy and the consumer happy if that is possible then this market cannot be efficient look at on contrast look at our efficient market over here we're saying 25 000 25 000 apartments are rented look at the next person this person is willing to rent an apartment but he'll only rent it out to somebody if he gets thirteen hundred dollars this person will will buy an apartment as a consumer they'll rent it but they need to get 1200 they can only pay 1200. so can these guys reach a deal where this person is willing to pay 1200 and this person needs 1300 to agree to let out his apartment nope there is no mutually beneficial deal here the only way they could strike a deal is that if one of them is forced to if this person's forced to pay more than they're willing to which he won't do in a free market this person is forced to sell it for less than he's willing to accept which he won't do in a free market so there's no mutually beneficial trades out here think about the minimum wage the minimum wage in california right now is 13 an hour an unemployment rate is high do you think there are companies out there who are saying we can't afford employees for 13 an hour but if we could pay temporarily while we're in this recession if i could pay some employees eight bucks an hour i would bring in a few employees and get some stuff done i absolutely think there are people out there business owners out there who are willing to pay eight dollars but can't pay 13 right now and do you think there are some out of work people out there right now who say god i need a job so bad now that the extra unemployment benefits are down if someone will pay me eight bucks an hour i will do it for now until the economy recovers and i can go back to getting what i used to be worth i think there are people out there who willing to do it work for eight dollars an hour so in the absence of a minimum wage they would come together and work for eight dollars an hour minimum wage says that's illegal okay that's an inefficiency now again and i explained this earlier there are many benefits to a minimum wage that can go beyond this and so i for one am a proponent of a minimum wage okay um and i certainly think eight dollars an hour is too low in california at least most parts of california um and so i'm not arguing that that deal should be able to be made i am arguing that the fact that deal can't be made proves the market is inefficient okay um and that's why you need government intervention in things like um uh in employment benefits and unemployment benefits okay so that's it um we are done with module four let me know if you have any questions and with that um i will see you in module five