this is our second of two lectures about government intervention we are going to discuss price controls uh we'll start off with a price ceiling or a price cap this is the maximum legal price at which a good can be sold and a binding price ceiling means that the maximum price is below the equilibrium price mostly it means that it makes a difference so so a price cealing of $500 per gallon for gasoline is not binding and would have no effect right so binding just means it actually makes a difference right if there was a law saying you can't charge more than $500 nobody was charging more than $500 anyway so let's look at some examples of price ceilings that were implemented and we're often are binding so us gasoline prices in the 1970s there are restrictions on prices there there it was an attempt to keep gasoline prices down uh ticket resale laws so some places there's limits on how how much money you can charge for a concert ticket or a baseball game ticket um housing in some cities so we'll talk a lot more about this so rent control all right so think about this one and you can use maybe quickly sketch a supply and demand graph a price ceiling will typically lead to a shortage a surplus or equilibrium we're thinking about a binding price ceiling here answer here is a a shortage and let's see why this is so let's think about a market that is initially in equilibrium at an equilibrium where Supply hits demand we have a quantity of 25 and a price of $2 then we go and put a price ceiling of $150 what happens then well let's look at a price of $150 and the whole point of our supply curve the whole reason it's there is so it can tell us things like when price is a $150 how many units are supplied right because the price wants to be $2 if we push it down to that ceiling of 150 that's going to be the price at a price of 150 suppliers produce 20 how about the and consumers wish to buy 30 units we see that on their demand curve at a price of $150 quantity demanded is 30 so what is the difference between quantity demanded and quantity supplied 30 - 20 = 10 we have more units demanded than supplied this means that we have a shortage of 10 units so what happens with a price ceiling we have lots of demand and not much Supply that's how we have a shortage Lots demand Supply is lower this means you want it you're willing to pay the ceiling price for it and you can't get it so let's look back here so think about these people in this region here so 30 uh 30 Mari showed up to buy 20 of them found a Luigi 10 of them were left out and they weren't allowed to do the thing that they did in our equilibrium example which was start offering a160 $1.70 for it right they are not allowed to do that you can't sell for more than $150 so what we have here is this persistent shortage and now we're going to look at the effects of price ceilings the first is what we call queuing or waiting in line um so this is sort of the kind of famous picture of 1970s gas lines and so what happens is if there's you know the price cealing on gasoline is a dollar there's going to be lots of people who are willing to pay for a dollar not that much gasoline and so these gas stations would open up and they would sell all their gasoline and then they would be out of gasoline and so if you if you're a driver you better hurry up and get there to buy the gasoline and so cars would line up early in the morning next we have there could be a secondary market so um the Nintendo switch I believe Nintendo sort of puts limits and they make Walmart and Best Buy all charge whatever their retail price is well you can buy that Nintendo switch at Walmart and it turned out that when it first came out there were a lot of people who wanted it and were willing to pay a high price so Nintendo switch consoles reach ridiculous prices on eBay as sellers cash in on pre-orders so you're a seller you buy as many Nintendo switches as you can at retail price and then you turn around and put them on eBay for a high price um you can try to bypass restrictions by bundling so um this is I was on the Super Bowl website a couple years ago and they do not sell you tickets on the Super Bowl website you can buy a bundle and is the you get a ticket and you get you AO creen Bay pregame party for this and so they're able then to not say no we're not selling these tickets for more than face value we're selling you a ticket and a party because it includes the party of course it's going to cost more than the face value of the ticket another one I thought this was pretty clever um during the the gas shortage say gas stations would offer overnight parking so if you want to pay to park at the gas station you park there overnight into the first person in line in the morning for gasoline all right our next thing we're going to discuss is rent control which I have subtitled how did Monica and Rachel afford that apartment so neither of them seem to be especially rich and they have this beautiful huge apartment in Manhattan so we're going to talk about rent control it comes up on one episode um that I think you know Monica got it from her grandma and it was rent controlled or something like that so what is rent control rent control is a specific type of price cealing that is applied to real estate so what are some of the negative effects well one thing that happens is you get a reduction in quantity supplied and this is you know straightforward from what we've learned about what a shortage is so if we look at supply and demand we said with a shortage we wind up down here the price has to be below it well in equilibrium we would have this many units supplied instead we only have this many units supplied so what this means is we have a reduction in quantity supplied again Supply didn't move instead we're just moving down and to the left because of the price ceiling causing a price decrease um and so the way this looks in rent control is that often places that would have been rent controlled Apartments instead become condos so the developers can sell the condos to buyers and then they don't have to worry about the rent control so so this is actually an apartment building somewhere in Canada I think it was Toronto where they started putting in rent control laws and this is an example of a place that was going to be an apartment building once the rent control laws are into effect the developer decided instead to make a condos which is reducing the quantity of apartment Supply right so if you're someone who doesn't have the money to buy an expensive condo downtown you are going to be out of line that's one fewer apartment that you could rent um it makes people less likely to move so a common place I've seen this is that it's a common thing that will happen is families will have big houses when they have kids the kids move out the parents will then move to a smaller house well in New York um in places where there's rent control if you're living in some place that's rent controlled you're going to be very hesitant to leave it and move to a place that potentially isn't rent control and you have to pay a higher price so New York has the lowest housing turnover rate of the top 10 US cities because once you're in that rent control apartment you don't want to leave it um there's also potentially deterioration and lack of Investments this was was this interesting article I was reading the New York time a couple years ago and what they were talking about were these R these deeply rent control Apartments so there's so I don't know all the rent control laws but there's typically there's limitations on how much you can raise the rent um to a given tenant so when a tenant stays there and sometimes you sort of resets you can raise it to you can raise the the rates more once the tenant leaves you have a new tenant and so there are some apartments that are rent controlled and the same tenant has been in there for decades and so the the rate is much is very low it's below market rate and so what happens then is the owners the landlords have just stop taking care of them or taking very poor care of them because you call up the landlord and say hey I you know I need my wash my bath toe Rec clocked it's all dirty looks gross the landlord says no and if you don't like it you can find somewhere else to live because there are a whole bunch of people who would love to move in here and so you'll notice that these are generally negative things and especially these top two are um note that rent control is typically meant to address the fact that it's hard to find housing in New York City it's very expensive well when you reduce the supply of apartments and have the people living in rent controll apartments less to move that actually makes it harder for you to find somewh this is one of the few areas where economists agree um so I have a couple of these surveys it was um they do these surveys of economists they get a broad view across the political spectrum and they ask them sort of opinion questions in this one they asked if the if they agreed that rent control laws have a positive impact on the amount and quality of broadly affordable rent house rental housing and cities that have used them basically is a is rent control good and you'll notice there is very strong agreement that they were bad so strong dis so people most of them strongly disagreed with the statement and so again the idea here is that economists believe that for the most part price signals are good and when you try to distort them by these sort of blunt rent control laws they wind up not being they wind up not helping in the way they would help next we have price floors that the minimum legal price at which a good can be sold um we have the same terminology here with a binding price floor means that the minimum price is above the equilibrium price you know if there was a price floor of one penny per gallon on gasoline that would not be binding because gasoline already costs more than a penny a gallon this is most commonly seen in minimum wage laws so one thing to remember with wages and the labor market we briefly talked about this we were learning about markets is that in labor markets workers are the suppliers so again in most of your life you probably think of yourself as a buyer or a demander you go to the store and buy groceries you go to the restaurant and buy food you give your college a lot of money as a demander of an education however when you go to work you are actually a supplier you are supplying someone with your labor firms are the demanders of Labor and so the price we're going to say is the hourly wage is the price of Labor well let's look at the supply and demand for labor and we're actually going to talk a lot more about lab labor markets in a few weeks I think it's a really interesting chapter we're just kind of touching on a little bit today so let's suppose the equilibrium wage is here and then a minimum wage is implemented up here notice what happens so there's our price floor and we have lots of units supplied right lots of people want to work for the higher wage not many units demanded there are fewer people willing to hire if they have to pay a higher wage so what happens well basic Theory and so we get this surplus of Labor basic Theory suggests that minimum wage laws should lead to fewer workers being hired right again this is really basic all you have to believe is that Supply slopes up and demand slopes down what do we get we get fewer workers being hired notice our equilibrium quantity goes from here to only this many units of Labor being demanded this many people being hired so you have then is these sort of few lucky people who get the high paying jobs and then lots more unlucky people who are unable to find work this is just based on the law of demand when the price goes up and the price in this case the price of an employee we get a reduction in demand or reduction in quantity demanded and this case reduced hiring right we're moving price went up so we move up into the left on the demand curve the similar takeaway to price ceilings or the um example we talked about with Uber those who get minimum wage jobs do better but the many people who cannot get a job do worse so so that's our basic Theory you put in a minimum wage fewer people get hired however the actual empirical evidence so we've really looked at data about minimum wage laws it is typically ambiguous or predicts small effects and probably because of this when you surveyed the same economists as we did the survey for rent control there's much less consensus among economists so survey of economists asking if they agree that minimum wage laws will decrease the employment rate of low wage workers and so they're really on both sides and the biggest most common answer was uncertain okay let's start to think about why this might be I got a clicker question for us an increase in the minimum wage does not cause unemployment to change much so we'll say we looked at some data and we found this this suggests that labor demand is elastic inelastic or un elastic the answer here is B inelastic so let's um so notice here we're kind of learning we've learned about supply and demand we learned about elasticity and now we're going to get to use that here and this I think is an interesting question right rather than just sort of throw our hands up and say why is it that we don't see this data why is it that we're not seeing these huge decreases in the employment rates when we put in minimum wage flws why maybe let's think about what we could think about supply and demand so here's our minimum wage and here if we have relatively elastic demand notice that demand curve is relatively flat we get a big reduction in the demand for labor so a big reduction in the number people hired If instead so if we don't have this inelastic or this elastic demand curve instead we have a inelastic demand curve then what's going to happen for the same increase in wage so we started off here and went here notice that when we move along the inelastic demand curve we get a much smaller reduction in the hours of Labor demanded so one way to think about this is that perhaps what's going on here is the firms that are hiring um low wage or minimum wage workers what they may have may be the case that they found that you know what if I have to pay $6.50 instead of $6 well reduction in quantity demand for McDonald's might be they have to figure out a way to run their store every day with 11 people in there instead of 12 right that might be what their domain you know they're thinking about doing it might be the case that you know what we're not paying these workers very much anyway we're used to running it with 12 people it would kind of be a hassle for us to reconfigure the whole place so what we're going to do is even though our wage has gone up we're not PL we're not planning to reduce our demand for workers so that's one example maybe demand for Laborers in elastic that's that's one possibility and the other thing is some results may not show up in employment statistics so perhaps you'll be less likely to hire certain groups so here what's going on is we get lots of applications for the job wages went up all of a sudden lots of people want them these jobs and one thing that has been found is that um teenagers are now less likely to be hired right so if I'm now getting a whole bunch of applications a lot of firms would prefer to hire an adult to a teenager the adult probably has some work experience they might think they're more you know more likely to know to show up for work and be responsible another thing that happens is there's sort of um ways that they kind of make your job less you know they make your job worse U one thing that's come up is unpredictable hours I've seen some of these low wage jobs They al they have like apps where you could get called into work all of a sudden and what's going on here is well you know paying a higher wage because of the minimum wage law we're trying and we know that there if this person leaves we'll have plenty of other people willing to work because again we have all these people will worth of high wage so we give you unpredictable hours so it's sort of you're you know you're getting paid more but you're having to deal with this thing with the unpredictable hours um similarly deterioration of working conditions you know now that I have to pay you more I'm not going to give you a paid break and so you're getting more money but I've made your job a little bit worse um here's one policy example uh which relates to kidney donations so Supply almost all of us are born with two kidneys but only need one what does the demand look like well there's around 80,000 people who are waiting for a kidney transplant this is something with a that would have a very high marginal benefit so it's been estimated that the quality of life would the value of that improving would be around $500,000 which if you've known anybody who's had to be on analysis sounds completely reasonable there is currently a price ceiling of0 it is illegal to be paid for organ donation this by the way is true almost everywhere in the world and so what it looks like is if you imagine the market for kidneys I guess someone I think did a did some research and they they guessed that the price would be around $115,000 um and so however that would be the equilibrium price instead what we have is a price cealing of zero so we have a massive shortage so there are lots of people who AR unble to buy kidneys so we have this is their demand Supply is way down here