Government Intervention- Micro Topic 2.8
Summary
TLDRIn this educational video, Jacob Clifford uses a chicken murder mystery to explain the economic concept of price controls, including price ceilings and floors, subsidies, and taxes. Set in 1971 during inflation, the video illustrates how government interventions like Nixon's price freeze led to unintended consequences. It explores how these controls affect consumer and producer surplus, leading to inefficiencies like surpluses or shortages, and introduces deadweight loss. The video concludes with a pop quiz to test viewers' understanding.
Takeaways
- 🐔 The video discusses a chicken murder mystery using economic principles to explain why it happened.
- 📈 The script explains how inflation in 1971 led President Nixon to implement a price freeze, affecting the chicken market.
- 📉 The price freeze caused unintended consequences for chicken farmers who couldn't profit from selling chickens at the controlled price.
- 📊 The video uses diagrams to illustrate the effects of government interventions like price ceilings and floors on consumer and producer surplus.
- 💰 It discusses how price ceilings can lead to shortages and price floors can lead to surpluses, both resulting in deadweight loss.
- 🚫 The script points out that price controls need to be binding (below or above equilibrium) to affect the market.
- 💵 The video explains subsidies, showing how they can lead to overproduction and hidden costs for taxpayers.
- 💼 It also covers taxes, demonstrating how they can reduce production and result in government revenue but still cause deadweight loss.
- 📚 The script emphasizes the importance of understanding these concepts for microeconomics classes and provides resources for further study.
- 🎓 The video concludes with a pop quiz to test the viewer's understanding of the discussed economic concepts.
Q & A
What is the main topic discussed in the video script?
-The main topic discussed in the video script is the impact of government intervention in the market, specifically using the example of a chicken farmer and price controls to explain economic concepts such as consumer surplus, producer surplus, and deadweight loss.
What is the 'chicken murder mystery' mentioned in the script?
-The 'chicken murder mystery' refers to a real incident where a farmer was filmed drowning live baby chickens in a barrel. The video uses this incident as a starting point to discuss the economic reasons behind such actions, which are linked to government price controls and inflation.
Why did President Nixon implement a price freeze in 1971?
-President Nixon implemented a price freeze in 1971 to combat serious inflation in the U.S. economy, aiming to prevent prices from rising further by freezing all prices and wages for a period of 90 days.
What unintended consequences did economists predict from Nixon's price freeze?
-Economists predicted that Nixon's price freeze would lead to unintended consequences such as shortages, surpluses, and deadweight loss due to market imbalances caused by the price controls.
What is a price ceiling and how does it affect the market?
-A price ceiling is a government-imposed maximum price limit on goods or services. It can lead to shortages if set below the equilibrium price because consumers will demand more than producers are willing to supply at that price, resulting in a decrease in producer surplus and potential deadweight loss.
What is a price floor and how does it affect the market?
-A price floor is a government-imposed minimum price limit on goods or services. It can lead to surpluses if set above the equilibrium price because producers will supply more than consumers are willing to buy at that price, resulting in an increase in producer surplus but also potential deadweight loss.
How does a government subsidy affect the market for chickens in the script?
-A government subsidy in the form of $10 per chicken leads to an increase in production as the supply curve shifts right, reducing the price consumers pay. However, it results in overproduction and a hidden cost to taxpayers, who fund the subsidy, potentially leading to deadweight loss.
What is the effect of a tax on chicken production as described in the script?
-A tax on chicken production increases the cost for consumers and reduces the income for producers. It shifts the supply curve left, leading to a higher price for consumers and a lower quantity produced, which can also result in deadweight loss.
What is deadweight loss and how does it relate to government intervention in the market?
-Deadweight loss is a decrease in economic efficiency that occurs when the quantity of a good or service demanded and supplied in a market does not equal the socially optimal quantity due to market distortions like taxes, subsidies, or price controls. It represents the loss of total surplus that could have been achieved at the equilibrium.
Why might government intervention sometimes be necessary despite the potential for deadweight loss?
-Government intervention might be necessary to address market failures, promote social welfare, correct externalities, or reduce income inequality. While it can lead to deadweight loss, the intervention aims to achieve broader economic or social goals that may outweigh the loss.
What is the significance of the 'pop quiz' at the end of the script?
-The 'pop quiz' is a teaching tool used to engage viewers and test their understanding of the economic concepts discussed in the video. It encourages active learning and reinforces the key points of the lesson.
Outlines
🐔 The Chicken Murder Mystery: An Economic Perspective
In this paragraph, Jacob Clifford introduces a unique case study involving the drowning of baby chickens by a farmer, linking it to economic principles. He sets the stage by explaining the context of 1971, a year marked by inflation in the U.S. economy. President Nixon's implementation of price controls aimed to curb inflation inadvertently led to unintended consequences for chicken farmers, who could not profitably sell their chickens due to price freezes. The paragraph emphasizes the importance of understanding consumer surplus, producer surplus, and deadweight loss in economics, particularly when government interventions like price controls disrupt market equilibrium.
📉 The Effects of Price Controls on Chicken Supply
This paragraph delves deeper into the implications of government price controls on the chicken market. Clifford explains the concept of price ceilings and floors, illustrating how a price ceiling set below equilibrium leads to shortages, while a price floor above equilibrium results in surpluses. He uses the example of a price ceiling at $10, which causes a significant gap between consumer demand and producer supply, resulting in deadweight loss. The discussion highlights the critical need for policymakers to understand market dynamics, as ineffective price controls can lead to adverse outcomes, such as the tragic case of the 'murder chickens.'
Mindmap
Keywords
💡Demand and Supply
💡Equilibrium
💡Consumer Surplus
💡Producer Surplus
💡Inflation
💡Price Controls
💡Deadweight Loss
💡Price Ceiling
💡Price Floor
💡Subsidies
💡Taxes
Highlights
Introduction to a chicken murder mystery using economics to explain the situation.
Clue one: The person involved is a chicken farmer, not a random individual.
Clue two: The year is 1971, a significant time for economic policies.
Clue three: President Nixon's price freeze policy in response to inflation.
Economists warn of unintended consequences due to price controls.
The price freeze did not apply to all goods, leading to increased costs for chicken feed.
Chicken farmers could not make a profit, leading to the tragic drowning of chickens.
Explanation of consumer surplus, producer surplus, and deadweight loss due to government intervention.
Government interventions can sometimes help society, such as in pollution control or breaking monopolies.
The impact of price ceilings on the market, leading to shortages.
The impact of price floors on the market, leading to surpluses.
The difference between binding and non-binding price controls.
Analysis of government subsidies and their effect on chicken production.
The hidden costs of subsidies and their impact on taxpayers.
The effect of taxes on chicken production and the resulting deadweight loss.
The importance of understanding consumer and producer surplus calculations.
The use of visual aids to help remember key concepts in microeconomics.
A pop quiz to test understanding of the concepts discussed.
Encouragement to watch more videos and use the ultimate review packet for learning microeconomics.
Transcripts
hey internet this is jacob clifford now
you've already learned demand and supply
equilibrium how these curves shift
consumer surplus producer surplus so now
it's time to take all that stuff and
solve a mystery specifically
a chicken murder mystery this murder was
actually cut on tape this guy was
dumping boxes of live baby chickens
into a barrel to drown them oh that's so
sad let's see if you can use economics
to explain why this is happening so
here's some clues
number one this is not just some random
guy that likes killing chickens he's
actually a chicken farmer whose job is
to raise chickens
clue number two the year is 1971 and
clue number three
this guy's president
in 1971 the u.s economy had a serious
problem
with inflation so to keep prices from
going up even further
president nixon did this i am today
ordering
a freeze on all prices and wages
throughout the united states for a
period of 90 days this was the first
time that widespread price controls were
used in the united states
since world war ii but economists were
the first to point out the policy was
going to lead to a lot of unintended
consequences
like murder chickens one of the many
problems was the price freeze didn't
apply to all goods and services so the
price of chickens couldn't go up
but the price of agricultural goods and
chicken feed could go up and the result
was chicken farmers that couldn't make a
profit off selling those chickens
so they drowned them in an introductory
microeconomics class you have to be able
to draw what happens to consumer surplus
produce surplus
deadweight loss whenever the government
intervenes in a market specifically
whenever they use price controls
subsidies or taxes there's plenty of
times where government intervention
actually helps society and markets for
example we're trying to stop pollution
and help the environment
or we're trying to get rid of monopolies
or we're trying to help the poor and
disadvantaged we're going to talk about
most of those concepts
in unit 6. but for now let's talk about
situations where the government comes in
and messes things up let's just assume
the equilibrium price of chickens is
twenty dollars and the quantity that we
have produced in the market
is 30 million chickens that's the
socially optimal quantity where there's
no deadweight loss and we've maximized
consumer surplus
and producer surplus if the equilibrium
price of chickens is 20
but the government says you can't raise
the price of chickens above ten dollars
the result is going to be a shortage at
a ten dollar price consumers want to buy
50 million chickens that's the coin
demanded
but producers have no incentive to
produce them so they're only going to
produce 10 million chickens
this is a price ceiling it's a
government decree that keeps the price
from going up
to equilibrium now notice that it also
changes the consumer and producer
surplus now
producer surplus is a lot smaller
consumer surplus is here
and that's going to lead to deadweight
loss
the market is no longer producing the
amount the society actually wants
so the result is a shortage in the bunch
of murder chickens
okay now let's switch it up let's say
the government sets a minimum price
at 30 and you can't sell chickens for
anything less than that again we're
going to be at dis equilibrium so
producers want to produce
50 million chickens but consumers at
that high price don't want to buy them
they're only going to buy 10 million
so we have a surplus so consumer surplus
would be up here
producer surplus would be right here and
again we'd have deadweight loss
notice that in both cases whether it's a
ceiling or a floor quantity is going to
be less than the original equilibrium
we're going to end up with deadweight
loss now one of the things you're going
to have to watch out for here because
teachers and professors love it
is putting a price ceiling above
equilibrium or a floor
below equilibrium in those cases the
floor and the ceiling are not
binding in other words nothing will
happen in the market so for example a
price ceiling at 30
has no effect on the market nothing's
going to change consumer producer plus
will be exactly the same as it would
at equilibrium because the price is
going to stay at equilibrium so just
remember
to be binding to have an effect on the
market a price ceiling has to be below
equilibrium
and a floor has to be above it now
policy makers and economists know the
problems with price control so a lot of
times they move away
from ceilings and floors and instead use
subsidies so let's analyze what's going
to happen when the government gives a
ten dollar per chicken subsidy
to chicken farmer so now each chicken
can be sold for 10
less than before so the supply curve
shifts the right
by a vertical distance of 10 and on the
surface that looks great the price has
gone down there's more chickens being
produced and everyone's happy but
there's some hidden costs here because
this graph doesn't show
all the money that taxpayers are giving
these chicken farmers that new
equilibrium price of 15
is how much consumers are paying for
chickens but don't forget producers get
another 10
on top of that so how much the producers
get to keep is 25
so that 10 per chicken subsidy times the
40 million chickens we're producing
represents the amount that taxpayers
have to pay the chicken farmers
and the biggest problem is we're still
not producing the amount society wants
in fact we're over producing chickens
we have 40 million instead of 30 million
that subsidy was a bad idea we have
way too many tickets and again we'd have
this idea
of deadweight loss
okay last one let's go look quickly at
taxes let's say instead of a ten dollar
subsidy
there's a ten dollar tax for each
chicken that these producers make
each chicken would cost ten dollars more
so the supply curve
would decrease by a vertical distance of
ten dollars so now the new equilibrium
price is 25 dollars and the quantity is
20
million but that price of 25 is only
what consumers are paying
it's not what producers receive because
of the 10 tax producers only get to keep
15 so that vertical distance times the
quantity
that's the tax revenue unlike a subsidy
taxpayers and the government
aren't spending money they're actually
getting money but the result is still
deadweight loss
general continue 20 million chickens are
being produced even though society wants
30 million chickens produced so that's
the area of deadweight loss and that's
the tax revenue that goes to the
government and of course you need to be
able to show and calculate
consumer surplus and produce a surplus i
went over that
super fast but for your economics class
you have to be able to do
all these calculations and draw all
these graphs so you're gonna have to
practice i made a whole video that talks
more about taxes and gives you some
questions to have you calculate consumer
and produce surplus so make sure to go
watch that and be sure to get my
ultimate review packet it has a practice
sheet that covers these specific
concepts it also has practice exams
exclusive videos
it's the fastest and best way to help
you learn microeconomics the link is in
the description below but don't go
anywhere we have two things to do
as you know i always add something to
the wall behind me to help you remember
those key
concepts so to help you remember
government intervention ceilings and
floors subsidies and taxes
i have this this is going to help you
remember those dead chickens and it's a
good reminder that when it comes to the
free market
sometimes government involvement is
annoying
and the second one it's time for a pop
quiz
i'm giving you a few practice multiple
choice questions but they're not going
to be on the screen for very long so
make sure to pause the video
then check in the comments for the right
answer and let me know how you did thank
you so much for watching my youtube
videos and subscribing to my channel you
rock
until next time
you
5.0 / 5 (0 votes)