Lecture Notes: Price Controls and Their Effects

Introduction

• In August 1971, President Richard Nixon implemented a freeze on all prices and wages in the U.S. to control inflation.
• Price increases became illegal, leading to significant market disruptions.

Effects of Price Ceilings

• Price Ceiling: A legal maximum price that can be charged for a product.
• Market equilibrium price often higher than the price ceiling, leading to shortages.
• Buyers cannot signal demand by paying more, and suppliers lack incentive to increase supply.

Consequences of Price Ceilings

• Shortages: Quantity demanded exceeds quantity supplied.
  • Example: 1970s gasoline shortages led to long lines at gas stations.
  • Time spent in lines increased effectively raising the non-monetary price.
  • Time wasted as sellers did not benefit from it unlike monetary transactions.

Economic Discoordination

• Price controls disrupted economic coordination.
  • Example: Steel shortages delayed construction and led to factory closures.
  • Ironically, steel shortages also impacted oil drilling during an energy crisis.
• Disruption in resource allocation:
  • Heating oil not distributed to high-demand areas due to restricted prices.
  • Example: 1972-73 east coast suffered from cold while other areas had surplus.

Unintended Consequences

• Chickens Drowning: Farmers faced price ceilings on chickens, not on feed.
  • Feeding chickens was unprofitable; farmers drowned chicks to avoid losses.
• Numerous other unintended results from price ceilings.

Conclusion

• Price controls have wide-ranging and often negative effects.
• Future videos will explore deeper into effects and analysis using supply and demand principles.

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• Next Steps:
  • Review the economic impact and unintended consequences of price ceilings.
  • Prepare for discussions on the five types of effects caused by price ceilings.
  • Engage with practice questions to test understanding of concepts.