Crash Course Economics: Good Intentions and Market Effects

Presenters:

Introduction

Topic: Impact of good intentions in economics, specifically price controls and subsidies.
Key Concept: Government intervention can derail or distort markets.

Definition: Government sets a maximum price for goods/services.
Example:
- Hypothetical: Gas price capped at $1 per gallon.
- Reality: 1970s U.S. under President Nixon.
- Consequence: Shortage as demand exceeds supply.
- Real-World Example: Venezuela's price controls leading to shortages in basic goods.
Rent Control:
- Common in cities like New York and San Francisco.
- Aim: Increase affordability.
- Result: Reduced quality and quantity of housing.

Definition: Government sets a minimum price.
Example:
- Hypothetical: Corn price floor at $7 when equilibrium is $4.
- Consequence: Surplus as supply exceeds demand.

Definition: Government payments to individuals/businesses to offset costs and achieve public goals.
Examples:
- Agricultural Subsidies:
  - History: Started in the Great Depression with the Agricultural Adjustment Act of 1933.
  - Issues: Often benefit non-poor farmers, discourage innovation.
  - Modern Context: Focus shifted to crop insurance.
- Renewable Energy:
  - Argument for: Encourage development and reduce underproduction inefficiency.
  - Argument against: Markets already incentivize innovation, subsidies may create false demand.

Deadweight Loss:
- Caused by inefficiencies from price controls and subsidies when markets are not at equilibrium.
Market Efficiency:
- Generally, markets efficiently allocate resources.
- Government intervention sometimes necessary when markets fail.

Government policies like price ceilings and floors often fail to improve welfare.
Market failures can justify government intervention.
Ongoing debate over effectiveness of subsidies tied to societal values.