price controls destroy the signaling and incentive value of prices and cause distortions in markets let's discuss another classic example laws against price gouging after natural disasters after a hurricane there's often need for basic supplies and a great deal of difficulty getting these supplies into affected areas but at the same time governments often have laws against raising prices too much after a disaster these laws are usually written vaguely with bans on unconscionable price increases whatever that means there's a great need demand for goods like ice food generators and gasoline so let's draw with the market for generators looks like before the hurricane so there's a demand curve and a supply curve there's a market equilibrium at a quantity of q0 and a price of p0 so let's call this demand curve d0 so now the hurricane hits demand increases to d1 [Applause] in a normal market all that demand would lead to an increase in price and suppliers would take that signal to start bringing in generators since they can sell them at a higher price of p1 and we get an equilibrium quantity of q1 that covers the higher marginal cost of bringing generators into the affected area but let's suppose the government makes it illegal to charge more than the previous price of p0 quantity demanded is going to be even higher all the way out to here at q2 and suppliers won't bother taking on the expense of bringing more generators into the hurricane zone since they can't charge a higher price to cover their costs they will still supply q0 so we get a shortage of q2 minus q0 and we'll have misallocation the generators aren't necessarily going to the people with the highest willingness to pay maybe you could have gotten by without a generator you wouldn't have paid this higher equilibrium price but you happened to get lucky and see one when you were at the store and since it's not any more expensive than it was before you go ahead and buy one just in case maybe even two here you're a winner from the price ceiling but it's only because you got lucky meanwhile someone who really needs a generator to keep their family safe can't get it there's a shortage and they can't get it at any price even though their willingness to pay was much higher than yours remember that prices are a messenger they tell suppliers to bring more generators to the area and they make consumers stop and think about whether they really need a generator at that higher price the artificially low price leads to over consumption and under provision a shortage and there's deadweight loss and we can use this exact same graph to talk about what happens to transportation on a busy saturday night if governments regulate the price of cab and ride share rides and don't allow them to adjust there's an increase in demand because more people are going out in a well-functioning market price would increase and more drivers would get on the road offering rides instead the price ceiling leads to a shortage of rides and again misallocation you might only live a mile from the bars but you were lucky enough to find an empty cab meanwhile someone who lives much further away maybe shouldn't be driving home maybe stuck in the rain who would have been willing to pay a lot more for the ride can't find one one last example for price ceilings one that you've definitely experienced but maybe didn't realize free parking free parking has a price ceiling of zero at a price of zero there's a lot of demand so how do people end up paying for parking with their time driving around looking for a spot the opportunity cost of that time ends up being worth quite a lot you might not have paid any money out of your wallet but you paid it out of your time and again someone who decided to drive five blocks to get a cup of coffee might end up getting one of those scarce spots while someone trying to pick up a large item doesn't even though they were willing they would have been willing to pay much more so price controls are a very blunt instrument they destroy productive exchanges between people who want to purchase an item and those who want to sell it at a price that the government says is against the law they lead to misallocation of resources long lines and black markets these policies can cause serious distortions but governments use them quite a bit people don't like high prices of course and unfortunately price controls seem like an easy solution to a difficult problem but this may be because many policy makers never studied don't remember or prefer to ignore the principles of microeconomics