The Cost of Price Controls | Cash Course: Economics | PragerU Kids

before we start this episode here's a quick preview of what's coming ready to take charge of your finances and master The Art of Money Management cash course is your ultimate guide to financial literacy from personal budgeting to macroeconomics check out more episodes at prageru.com all right welcome back to the game of prices let's see what our contestant has won drum roll please congratulations you've won One Price controls that doesn't sound like a price no but they are they help keep things more affordable really I live in an area with a lot of price controls and it's bad what are you doing stick to the script no way I think it's time to turn this show into an episode of in a free market of economy consumers and producers communicate their preferences to each other with prices prices reflect how much of something is available Supply and how much people will pay for it demand if left alone prices will reach a natural equilibrium meaning that the amount supplied will equal the amount demanded prices however can become distorted and pushed away from that equilibrium when the cost of a good or service is set at a certain level this is called price controls and they're often implemented by by the government when goods and services aren't allowed to rise above a certain price it's called a price ceiling and when they're not allowed to fall below a certain price is called a price floor so let's take a look at each you're not the host anymore first let's take a look at Price floors this is the lowest amount that can be paid for certain Goods services or labor if the natural equilibrium is below the price floor and prices cannot fall to where they want to go this could have serious consequences for any economy an example of a price floor is the minimum wage which is the lowest amount someone can be legally paid for their work but when that wage is set higher than the natural market price for that job businesses will be challenged to make ends meet this increases the labor costs of a business adding to its existing expenses without a similar increase in Revenue profit margins will be much tighter but the minimum wage helps more people make more money yeah well that's the idea but not really what happens usually H to pay a higher price for labor businesses will try to lower their costs such as reducing the number of employees or cutting employee hours as a result people willing to work may have difficulty finding a job especially if they're younger or less experienced whoops if a business decides to keep its workers it will probably pass that higher cost onto consumers with higher prices what however raising prices too much can be risky for for a business since consumers may not be willing or able to pay them price floors like a minimum wage can lead to too many workers looking for jobs in economies surpluses create inefficiency and waste the time energy and skills of its citizens I don't want to play anymore now now we still need to talk about price ceilings a price ceiling is the highest amount that can be paid for certain Goods services or labor the goal of a price ceiling is to make sure the price of something thing doesn't go above a certain level if the natural equilibrium is above the price ceiling and prices cannot rise to where they want to go this can also have serious consequences for an economy take the case of rent control a policy that aims to cap rent at a certain price and limits when and how much that price can be increased so uh what's wrong with protecting renters oh there's a lot wrong if renters are locked in at a low price they're likely to leave if renters are less motivated to leave that means less turnover and less available housing also since landlords aren't bringing in as much revenue from rent as they might in a free market they'll try to maintain their profit by cutting costs including maintenance and improvements less profit potential in areas with rent control will also discourage new construction this means the supply of new housing will attract more competition with other potential tenants yeah if you're your neighborhood has rent controls good luck trying to find a new place so that's why I've been living on my couch for the past 6 months you too price ceilings like rent control can result in shortages and lower quality of goods and services so price controls don't even help the people they're intended to help nope while price controls are often promoted as the solution to a problem they have led to damaging results everywhere they've been tried every historical example from ancient Rome to Soviet Russia and even to present day has led to the same results either an oversupply of things people don't want or shortages of the basic things people need so the next time you hear price controls consider the outcomes while these controls may sound helpful they prevent the market from reaching its natural equilibrium forcing prices to have a floor ceiling harms producers and consumers alike it's important to understand the negative impact these controls have on an economy so you can make better decisions when you vote or where you spend your money so do I win anything unfortunately this show has a price ceiling but Fe not oh here's a quarter Illinois watch more at Prager kids.com and parents don't forget to subscribe