CrashCourse - 2016-01-13
So, during times of inflation or deflation, why doesn't the government just set prices? It sounds reasonable, but price ceilings or floors just don't work. Adriene and Jacob explain why. Subsidies, however, are a little different, and sometimes they even work. We'll also explain that. Today you'll learn about stuff like price controls, deadweight loss, subsidies, and efficiency. Crash Course is on Patreon! You can support us directly by signing up at http://www.patreon.com/crashcourse Thanks to the following Patrons for their generous monthly contributions that help keep Crash Course free for everyone forever: Mark, Eric Kitchen, Jessica Wode, Jeffrey Thompson, Steve Marshall, Moritz Schmidt, Robert Kunz, Tim Curwick, Jason A Saslow, SR Foxley, Elliot Beter, Jacob Ash, Christian, Jan Schmid, Jirat, Christy Huddleston, Daniel Baulig, Chris Peters, Anna-Ester Volozh, Ian Dundore, Caleb Weeks -- Want to find Crash Course elsewhere on the internet? Facebook - http://www.facebook.com/YouTubeCrashCourse Twitter - http://www.twitter.com/TheCrashCourse Tumblr - http://thecrashcourse.tumblr.com Support Crash Course on Patreon: http://patreon.com/crashcourse CC Kids: http://www.youtube.com/crashcoursekids
Subsidies (especially farming subsidies) have another negative aspect. Let's look at Burkina Faso. One time, Burkina Faso was leading the world's cotton production. The price was low, the quality was great. Naturally, their cotton was bought. US cotton farmers were not able to produce cotton as good as the cotton from Burkina Faso. So they called for subsidies and they got subsidies. That distorted the market: US cotton was far more cheaper and the Burkina Faso cotton was not bought anymore. The Burkina Faso cotton industry got destroyed even when they made better cotton. Burkina Faso was in the WTO and the WTO ruled, that the US subsidies were illegal but that was no problem for the US.
So: Subsidies have the ability to destroy developing markets.
Bad for Burkina Faso but very good for US
You must have missed all of the previous episodes, bro...
@CW AtWork Other countries have every right to share in our Western Wealth.
Very interesting!
Jonas I mean that’s international trade, a government’s goal is to make sure the people part of the country have a good and healthy life. So from the US government’s perspective, they did the right thing.
The takeaway is: The real world is complicated and doesn't perfectly obey simplified models in textbooks. While price floors, ceilings and subsidies are usually a bad idea, occasionally they aren't.
one example please
Actually they do obey simplified models, quite well. There may be temporary distortions but then supply/demand dynamics eventually take over. Subsidies and ceilings and floors are ALWAYS a bad idea! Think about puerto rico. If people were allowed to price gouge suppliers would have been eager to ship fresh water as fast as possible by what ever means possible to puerto rico to maximize profit. This incentive temporarily would have hurt Puerto Rican's financially but they would have gotten the supplies they needed to live in an expedited fashion. If I can make double selling water to you vs selling it to Aaron I am going to get you water as fast as humanly possible, or electricity etc....Price manipulation always creates issues if you think otherwise you haven't understood the supply/demand/price models and why they work.
To me "market failure" seems purely subjective...
Of course, but putting price controls on unnecessary things aren’t good.
No, they are always a bad idea. Even in a crisis, price controls will only make things work by collapsing production and supply. We've enough evidence and real world examples to go by ffs! Just look at Venezuela, or the USSR.
New Zealand removed agricultural subsidies and the value of farms and the farm output increased.
Part 1:
We all need food.
Got that you're right.
The supply, and demand of food changes.
There are points in time when there is lower supply, then demand. Prices go up resulting in many people having a much harder time affording food, some may starve
Prices have not spiked that much in times of crisis. Considering that food is just 10% of a persons disposable income. Food would have to rise 90% in order for them to not to afford food. You also ignore the fact that in times of crisis people find substitutes. Then when they run out of money because of the 90% spike in food they would have to go to the state for welfare to purchase the food. You have also assumed that the government is better at logistics in shipping that food from Point A to point B. The private market is better at logistics responding to market demand that the government.
Part 2:
It seems prudent for society to plan for these times, and prevent starvation.
What would be the most effective way to have a reserve of food, and if the reserve will expire soon how to efficiently use it
The most effective way? So the government can move food more effectively than the free market and the invisible hand? That is a logical leap. Does the federal government have a better understanding of how to move food than the private sector? Does the federal government know what to move better than the private sector? No No does the Government have a better equipment than than Walmart and the private sector. No Wrong on all counts. So no the government distribution of food does is not the most effective way to prevent starvation.
So? Price changes all the time and yet the the world keeps on turning. It's a really dumb idea.
@***** Yes obtain food that is the critical part. Obtain it. That does not mean there is a food shortage? No. There is plenty of food in the country and the world. They just lack the means and money to pay for food it which is how you obtain food. So the solution is to give them the means and the money to do so.
Collecting food from farmers is a farm more complicated and expensive solution. There is a high overhead cost to obtain that food and distribute it. All of that money spent on overhead is money not spent on the poor. So a better solution is to just giving the money to directly to the poor.
@***** When you go to a grocery store in the poorest parts of the country do you see a lot of empty shelves? NO Then starvation is not due to the lack of food production is it's because people lack the means to buy food. Not because of some kind of supply and demand problem.
@Duck Man cap and trade milk so the cows aren't udderly milked dry. 😗
Also, cap and trade babies. Each family given 1 child credit. Those that don't want kids can sell their credit, those that want 2 or more can buy child credits. Rein in that population faster
"Deadweight isn't just a good description of your ex" 😂
What if price controls are used to cap the prices of goods which have artificially high prices. Like pharmaceuticals which sell on 2000% profits.
Their demand hardly goes down so market can't bob the price.
Tran Son patents are necessary for innovation
If a company has a product that produce 2000% profit, this will serve as an incentive to other companies to produce similar products, and over time the price will go down.
The problem is if the government prohibit other companies to produce similar products.
If you price control something with an artificially high price it's generally a bad idea for the most part. If it's artificially high because a monopoly naturally formed then the proper action is to break up the monopoly not price control. If it's artificially high because of a government given monopoly/exclusivity for a particular thing then there's usually a reason such as trying to get a certain thing developed.
@Kevin Soares Coutinho yes it depends if there is a patent on a particular product... which is quite hard to get around
Patents are not inherently bad. They encourage investment and innovation. If patents are removed, companies won't invest in research to develop new drugs because they have no expectation of profit. No person/organization goes into business to lose money. Research is expensive, so if costs can't be recouped because there are no patents, no one would be developing new drugs.
The solution is to award patents on a limited number of years. Put a stipulation in that the patent can only last after the cost of research has been recouped and the developer has profited x%. After that, the patent goes into the public domain and free market can take over. This allows the incentive to develop new drugs to remain while limiting the ability of companies to price gouge because they have a monopoly on a product.
Some key takeaways:
1. President Richard Nixon, 1970s, 90-day price and wage freeze to fight inflation. Milton Friedman, 'One of those plausible schemes with very pleasing commencement that have shameful conclusions'.
2. Price ceiling - Maximum price for a specific good or service
3. Price floor - Minimum price in a specific market. Keeping price artificially high and not allowing price to fall to equilibrium.
4. In terms of helping consumers and producers, price controls are counter-productive. However minimum wage is a better solution.
5. Economists generally agree that rent control results in reduced quantity and quality of housing that is available.
6. A subsidy is a government payment given to individuals, organizations or businesses to offset costs to advance a specific public goal.
It's quite sad that my country, Venezuela, is only mentioned to talk about how badly we fucked it up. And yes, it's worse than they said. For reference: an iPad mini is around 30 months worth of work at around minimum wage.
is their worse than their neighbor's?
+Christian Weibrecht Which neighbors? Colombia? I am unsure because i haven't been there, but people are leaving the country and Bogota is a popular destination, with the borders closed it's now more expensive to get there but people still finds a way.
+Nihar Baijal
Its because living costs are low in India. Inflation in Venezuela renders their high minimum wage useless.
+Nihar Baijal The Venezuelan governments imposes a three-tier currency exchange (they declare what US dollars costs in the national currency, this was mentioned in a previous episode of Crashcourse IIRC) instead of letting the markets dictate the price. The price of the dollar in the "black market" is around 140x times greater than the lowest official rate. The monthly minimum salary in Venezuela based on the black market dollar is less than $12.
The UN definition of extreme poverty is a family income of less than $1 per day. I think this is one big reason (the other is corruption) Venezuela keeps the low official exchange rate.
+RapiBurrito It also has one of the highest crime rates in the world AFAIK, and high corruption, in part driven by crime and gangs. The place has rolled back a lot. What happened over the last 5 years? :(
I like his ACDC belt.
As a venezuelan, I can confirm this video. Price controls and a limited amount of dollars a person can buy, have destroyed the economy.
The reason Venezuela's economy is bad is because of socialism.
A door price controls are socialism
Not even remotely closed to socialism…
Fid Marcano It has now
Expecting a follow-up in 2019 about how buying unlimited US currency would have saved the Venezuelan economy.
That moment you realize your government pays farms NOT to grow things.
I see this as a form of corruption ans cronyism
"physicists ... they have unbreakable laws and perfectly controlled experiments"
Laughs in failed graduate research experiments
thanks for mentioning venezuela, we've been suffering thanks to some ridiculous price control policies.
"Sometimes market fail, and that is why the government needs to step in."
F.A Hayek: "I have a word for you."
What about solarcity
That subsidy dropped cost snd increased efficiency
"except for maybe physicists, because they have unbreakable laws and controlled experiments"
oh my sweet summer child, you have no idea how wrong you are. (Quantum physics, AKA: everything you know is wrong.)
"The law of equilibrium" they say it's a law except when it's about minimum wage... it's either not a law... or you just don't want to acknowledge that minimum wage produces a price floor above equilibrium...
Bob Sagit It's a law in certain models of competition but not in others.
These are so interesting, engaging and entertaining :D i've watched 20 of these in 2 days (i'm planning to watch all 35 by the end of the day n.n ) i'm interested in economy and these make it easier for me to take information in and then research key points more in depth since my focus and attention span isn't all that great. Yet the way this is paced, presented and explained makes it fun to watch one after another :) Great content, props to both of you!
Watch "I, Pencil: The Movie" on youtube. You want regret it.
It is about how a free market works.
When you guys say " economist says/means/claims x", who are these economists?
99% of economists & Nobel prize winning economists.
That AC/DC belt is serious though, lol I love it
I am disappointed at the dead seriousness and annoyed sarcasm of these comments...
Ah well, at least there's still a comment about Mr. Clifford's ACDC belt.
I remember my high school economics teacher telling us about when he was a kid, he and his friends had a farm that they got just for collecting subsidies not to plant anything.
The joke about exes in the beginning was hilarious XD
This guy is actually really funny lol! Thanks for this series and video, it's truly helpful for my online economics class
"You watch Crash Course Economics, which means you're smart and funny and attractive" HAHAHAH
Fine. Except for you, friend.
Taking me back to my AP Microeconomics class days. Never thought I'd miss graphs so much!!
Thanks, this helped me out with my classwork.
I feel this video is a very right sided view, maybe the next could be less biased, thanks, big fan of the show
crash course has been helping me through my exams since the 1st semester. now im in 5th. thank youuuuu crash course!
1:20 The example begins by SETTING Max. prices, not "lowering prices", here is a fallacy.
Farmers make more than the average income? I grew up on a farm. My dad makes as much money as farmers did in the 70s. Thanks Reagan.
The intricate hoops people jump through to try and justify how the "economy" is not subordinate to agricultural output...
its really helpfull everytime. plz doing the good work of making education this accessible and responsible among the people. i intend to contiribute to this great work once when i have the resources to do so
Oh my gosh, the mention of Moonbase Alpha made me laugh.
Craig Benzine was mentioned in this episode(;P). 00:43
Suomi mainittu! Torilla Tavataan!!! :P
at 4:40 I think Clifford meant to say "a price ceiling on corn"
I really love this series. Keep it up!
3:54-thats either a really steep street or really crooked houses
Mr. Clifford, didn't you teach at San Pasqual?!
+FelixWing1999 Yep, that's me:)
This is the most civilized comments section I've ever witnessed on a video with more than 10 000 views
You had me at "funny, smart and attractive."
Thanks for this video! It’s an economics course for idiots, I didn’t go to college but if I did I probably wouldn’t have listened anyways, when you get older you find this information to be valuable!
my boy Jacob Clifford making it mainstream? the GOAT
Loving the AC DC belt :)
the takeaway: my ex is dead weight
Amazing how a delusional reality TV show megalomaniac brought all these forewarnings to the present.
9:23 aeiou
"Some economists argue that all government intervention creates a distortion"
ARGUE? What is there to argue? if the government wanted things to stay the way they are it wouldnt interfere at all. When someone interferes they WANT to change (AKA distort) something. And the thing with complex economies is that you cant touch one thing without touching everything else at the same time.
+isphus
They say distortion to imply the message: "GOVERNMENT INTERVENTION = BAD"
If they were being educational and honest, they would say "alteration" or "change" instead of a negative word like "distortion"
+Attila the Fun No, it's definitely a distortion. It has the effect of a lie (hence the "negative" language) on people, who plan their lives around the economy; if prices are not accurate, one's buying/selling plans cannot be accurate, and they are doomed to come to harm once the other shoe drops. So yes, distortion.
@Coolidge Dollar The point is to not use connotatively negative words since there are times where it is good and other times where it is bad.
I think the word "distortion" is used because it affects more than just what was intended to affect. Because it's all interconnected, a change meant for a positive effect somewhere might end up having negative effects somewhere else. It's not just a change, it's a distortion, because it's unpredictable and unintended.
Distortion is basically loss of efficiency.
In economy, allocation of resources happens with repeating Prisoner’s Dilemma, which allocates resources with Pareto efficiency. When government intervenes, it encourages Pareto-inefficiency by changing values in the matrix with subsidies.
Before subsidies
AA: 1-1
AB: 10-0
BB: 20-20
BA: 0-10
After subsidies
AA: 1-1
AB: 1-0
BB: 10-10
BA: 0-1
Thus, encourages to competition are blown. There is no Pareto-efficiency.
0. A - 2016-01-13
You know, it felt like you weren't explaining "subsidies" as much as you were explaining "agricultural subsidies in the United States".
Kataporis - 2020-02-13
Agricultural subsidies are likely the most common example I have seen for subsidies in economics and the real world; it's fitting.