hi guys today I'm excited because we are jumping into our first major paros topic price controls These come in two main forms price ceilings and price floors We are going to break down what each one means look at some real world examples and most importantly we dig into the tradeoffs involved Yeah Because as we have already learned economics is all about tradeups There is almost always a cost to every decision or policy Price selling is legal maximum price for good or service The price cannot go above this This is a legal maximum Classic example is rent control Imagine government wants to help a tenants They might impose rent control setting a maximum rent that landlord can charge The idea is to make housing more affordable Right The second type of price control price floor It is legal minimum price Common example is minimum wage In the labor market the price of labor is the wage So a minimum wage is set a minimum that employers can pay We will discuss minimum wage in more detail later But first let's focus on price ceilings Let's look at our apartment market Without any price control the market forces of supply demand determine equilibrium rent say $1,000 Now suppose government imposing of $800 So this red line that's rent ceiling Yeah this is a binding price ceiling because it is below the equilibrium rent The market price of $1,000 is no longer attainable What if government says ceiling of $1,200 like this It would be nonbinding because market price is already below it So only binding price ceiling have an effect with the $800 rent ceiling What's going to happen at this controlled price Quantity demanded increase right from,000 to 800 quantity demanded increase along the curve So more people want apartment at this lower price While quantity supplied decrease as price change from,000 to this controlled price 800 Yeah Landrols are less willing to rent at this low price So this create shortage problem More people want apartment than there are available So in this particular example the shortage is 100,000 minus 60,000 So we come up with 40,000 unit of shorty shy are not just theoretical when Zimbabwe faced the hyperinflation the government imposed the price controls on drinks among many others which led to empty shelves Yeah this is a textbook example of shortage We've seen similar outcomes elsewhere After World of Second New York City implemented strict rent control to keep housing affordable for returning soldiers and workingclass families Over time however landlords had little incentive to maintain or build new rental unit leading to housing shorty Similar pattern emerged during the 1970 oil crisis in the US To curb skyrocketing gas prices government imposed the price ceiling What happened Massive shortage with the drivers waiting in hours long line at gas station that often ran out of fuel Let's analyze the effects of price selling using consumer and producer surplus concept So that will help us understand the effect of price selling better Without price selling we have our usual consumer and producer surplus triangle So in this example the equilibrium price is 1,000 right So you can identify this upper triangle as consumer surplus and this bottom triangle as producer surplus Now with the price ceiling so at this controlled price $800 So what would be consumer surplus Consumer surplus is the area below demand curve and above price ceiling So area below demand above this price 800 It's tempting to think this whole triangle as a consumer surplus but it's not Only apartments that are actually rented count toward the consumer surplus So at this controlled price only 60,000 unit will be available in the market right So up to this point below demanded above price So this area this shaded area with a checkled line that is a consumer surplus on the price ceiling What about producer surplus It's a small triangle below price ceiling and above the supply curve So this small triangle it's clearly decreased right to surplus is sum of new consumer and producer surplus So sum of these two area now it's smaller than original total surplus The difference between original total surplus the this big triangle entire triangle right and new total surplus that difference is now this triangle right yeah now this is called dead weight loss it is a loss of efficiency these are mutually beneficial trade that no longer take place because of price ceiling There are other costs too We assume that people at the top of the demand couple get apartment but that's not always true who get the limited supply It might not be those who value it most It could be those who are willing to wait in line longer even if they don't value apartment as much Yeah this leads to inefficient allocation Yeah that was so clear in this example gas shortage problem So people who are willing to stand longer in the line they are not necessarily high valuation consumer Yeah their opportunity cost of standing in the line It's just lower So they may stand there right That's another source of inefficiency Pricing don't just affect quantity They also impact quality When landlords are legally prevented from charging rents that reflect market demand they have a little incentive to maintain or improve their properties Why spend money on renovation repairs or upgrades if those investments can be recouped through higher rent over time This can lead to deterioration in housing quality which disproportionately affects tenants who are already vulnerable In addition price ceiling often create condition for blank market When there is more demand than supply at the kept price some renters may be willing to pay more under the table to secure unit This can lead to illegal payments or side deals where landlords charge unofficial key money or upfront fees forms of rent that cult around the official ceiling These black market dynamics not only undermine the purpose of the policy but also make the system less transparent and less fair So price selling while intended to help consumer often lead to unintended consequences creating shorty reducing overall efficiency and sometimes even harming the very people they are designed to assist