Episode #20 – Price Controls, Subsidies, and the Risk of Good Intentions
Two weeks ago, when we last reviewed an episode, I was hoping that this week would be the third week in a row of solid and accurate economics from the good people at Crash Course. Episode 18 talked about the rather non-controversial topic of principles of microeconomics, and episode 19 chopped down common arguments against what is commonly referred to as “price gouging” and “predatory pricing”. Will they continue their streak in episode 20?
The answer is sort of, but not really. In this episode, Crash Course starts strong by railing against government-imposed price ceilings and floors (including rent control), but gets a little weak when talking about the use of subsidies. Let’s get started:
Let’s say the government forced gas stations to charge a dollar per gallon for gas. This might seem like a good idea, right? Mandated lower gas prices mean we all benefit. Not really. Society is actually made worse off. When the gas prices fall consumers will want to buy more, but producers will no longer find it profitable to sell gas. The lower price will decrease the amount of gasoline produced, and we’ve got a shortage.
This relates to last week’s point on price gouging. When the market price of a good is above what people are allowed to sell it for, sellers are not incentivized to increase their supply, and this results in a shortage. If you’ve been following what’s happening in Venezuela, you’ll see that price controls results in long lines for essential goods (including toilet paper).
Crash Course makes a similar argument against price floors:
Assume the government set a price floor for a bushel of corn at $7 when the actual equilibrium price is $4. The higher price would give farmers an incentive to produce more, but, at that high price, consumers would go buy substitutes […] The farmers wouldn’t necessarily be better off. They could sell corn at the higher price, but they wouldn’t have as many customers.
High prices naturally make fewer people buy a good. And fortunately, since consumers are not forced to buy any good (well, almost any good), they are more likely to take their money elsewhere, giving the sellers fewer customers and making them worse off overall.
Crash Course targets a specific type of price control popular in many urban areas, rent control:
The lower rent discourages renovation and new construction, reducing the quantity supplied. The result is a shortage of apartments with landlords that have few incentives to maintain their buildings or be responsive to their tenant’s needs.
If you’ve ever tried to look for an apartment in a big city like New York or San Francisco, you’ll notice that prices are ridiculously expensive. And for that expensive price, you receive a not-that-great apartment. Those fortunate enough to live an a rent controlled building become very discouraged from leaving, since they would have to pay the market rate if they moved apartments. Meanwhile, everyone not in a rent control building is subjected to high prices, low supply, and poor living conditions.
Note: At the end, Crash Course mentions that the economic rules of price controls do not apply to the minimum wage, which they promise they will get to in a later episode. We’re looking forward to that.
Crash Course comes out in favor of subsidies in an argument summed up perfectly in the last line of the episode:
Sometimes, markets fail. And that’s when the government needs to step in.
Let’s get into the real meat of their argument:
Crash Course briefly touches on the common arguments for and against subsidies. Proponents argue that subsidies help the producers by giving them free money, and they help the co