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[SQUEAKING]

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[RUSTLING]

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[CLICKING]

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JONATHAN GRUBER: So let's
continue our discussion

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of welfare economics.

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Just to review where
we are, the first set

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of lectures in the course were
about positive economics--

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about understanding where supply
and demand curves come from

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and what they mean.

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Now, last lecture,
we turned from

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positive to normative
economics and actually making

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judgments about whether
things are good or bad.

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And we introduced the concept
of welfare, economic welfare

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or well-being.

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And we talked about
consumer surplus, which

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is a measure of how well-off
consumers are made by a given

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exchange of goods and services,
and producer surplus--

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how well-off produces are made.

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We're going to start our lecture
by proving what's modestly

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called the first fundamental
theorem of welfare

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economics, which is that
competition maximizes welfare.

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So this is basically taking
our positive economics

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and meeting our
normative economics.

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That is, we are going
to talk about how

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the model we've
derived so far, which

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is the equilibrium under
perfect competition,

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happens to also be
the outcome that

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delivers the maximum
well-being to society.

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So let's step back.

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Well-being we called welfare.

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How do we define the
well-being of society?

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Well, we're going to start
with a simple definition, which

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is we're going to at least
say that social welfare--

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social welfare, the total
welfare of society--

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is simply consumer surplus
plus producer surplus.

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That is, we're not going to
put any different weights.

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We're not going to say we like
somebody better than another.

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We're just going to
say, look, surplus

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is produced by a transaction.

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And we just care about the
total surplus that's produced.

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And later, we can come to
help you about consumers

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versus producers, and we will.

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But right now, let's just say
we care about the total surplus

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that's produced for society.

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How much benefit is produced
by this transaction?

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Well, the benefits produced
by this transaction

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is going to be the surplus
generated for consumers

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by that transaction and the
surplus generated for producers

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by that transaction.

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So our total measure
of social well-being

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is going to be the sum of
consumer and producer surplus.

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And we are going to prove--

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as I said, you don't
need to know this.

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But in [INAUDIBLE] it's called
the first fundamental theorem

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of welfare economics, which
is that under the assumptions

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we've made-- which are many--

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under the assumptions
we've made,

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the competitive equilibrium
where supply equals demand

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is the point that
maximizes social welfare.

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That is, the key insight is the
point that the market naturally

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delivers.

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The equilibrium that's gained
by the market naturally

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happens to be the point
that also makes society

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as well off as possible--

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a very profound result. That
is, the positive conclusion,

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which is that supply
and demand will

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meet at a certain
equilibrium, delivers

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a normative conclusion,
which is that equilibrium

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is the point which
maximizes social welfare.

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Now, the best way to see
this is just graphically.

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So let's go to Figure 10-1.

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Figure 10-1 has supply
and demand curve.

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Once again, whether these
are curved or linear,

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it's still the basic idea
of supply and demand curve.

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So curve, supply
and demand curve,

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are things which are more
constant elasticity type

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curves.

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But that doesn't really
affect the intuition.

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We have here the triangles of
consumer surplus and producer

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surplus.

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So consumer surplus--
give me the letter.

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Somebody raise their
hand and tell me

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which letters on this diagram
correspond to consumer surplus,

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and why.

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Which areas denoted by
which letters correspond

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to consumer surplus, and why?

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Yeah?

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AUDIENCE: R and v.

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JONATHAN GRUBER: R and
v. And why is that?

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AUDIENCE: Because the price is--

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it really [INAUDIBLE]
here in between the supply

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and demand [INAUDIBLE].

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JONATHAN GRUBER: Exactly.

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Everything below
the demand curve

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and above the price
consumer surplus.

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So, r plus v. So therefore,
what's producer surplus?

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Same person.

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AUDIENCE: S, t, and u.

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JONATHAN GRUBER: S plus t
plus u is producer surplus.

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So, consumer surplus-- r
plus v. Producer surplus

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is s plus t plus u.

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You can see, those of you
who are graphically oriented,

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can immediately see the
sum of those two triangles

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will be maximized at the
intersection of the curves

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and nowhere else.

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So for example, let's think
about the case where I say,

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well, look, it's a shame
the price is that high.

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We ought to make
the price lower.

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Let's set a new price.

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So let's have the government
mandate a new price at P2.

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Suppose the government
intervenes and says,

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we're going to set
a price ceiling.

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We're going to say no one
can charge more than P2

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for their product.

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And won't that be a good
thing because the consumers

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will be better off?

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They'll pay lower prices.

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Well, what does that do?

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What does that do
to consumer surplus?

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Well, consumer surplus used to
be r plus v. It instead becomes

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r plus s, which is bigger.

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Consumer surplus rises.

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You lose the triangle v, and
you gain the rectangle s.

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But the key point is
at the price P2, yeah,

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that becomes the new
consumer surplus.

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The new producer
surplus is what?

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At that price P2, what's
the new producer surplus?

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Someone raise their
hand and tell me.

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Yeah?

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It's t.

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It drops to t.

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Producers just get below the
price above the supply curve.

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So what has happened to
total social welfare?

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It has fallen by
the amount v plus u.

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Total social welfare
has fallen by v plus u.

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So in some sense, two
things have happened here.

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We've set this price.

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The first is a transfer.

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We have transferred
the rectangle

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s from producers to consumers.

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s used to be part
of producer surplus.

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We're now giving
it to consumers.

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So first thing we
have is a transfer.

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That was probably the
idea of this policy--

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make consumers better off.

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So we transferred
what used to be

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producer surplus to consumers.

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That's the rectangle s.

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That's the first
thing that's happened.

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So thing one that's
happened is a transfer of s.

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But the second thing
that's happened

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is we have created what we call
a deadweight loss of u plus v--

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a deadweight loss
of u plus v. DWL--

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Deadweight Loss.

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What is a deadweight loss?

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That is the net
reduction in welfare

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from trades that are not made.

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The deadweight loss-- this is a
key concept we'll come back to,

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and I'll expect you
know it in your sleep.

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It's that deadweight loss is the
net reduction in social welfare

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from trades that are not made.

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The intuition here is
that every trade that

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makes at least one
party better off

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without making the
other party worse off

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is a good trade to do.

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Under the assumption
we've made so far,

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if you ever trade that increased
consumer surplus or producer

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surplus or both, that's
a good thing to have.

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Right?

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If my daughter has any song she
wants to buy by Kendrick Lamar

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that she values at
more than $1.00--

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she gets them for $1.00--

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anything which stops her from
buying those songs is bad.

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She's losing surplus.

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So basically, the key point
is that deadweight loss

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is an inefficiency.

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We talked about how
competition leads

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to maximally efficient
production through cost

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minimization.

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Competition also leads to
the maximum welfare outcome

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because that point is the point
which makes society best off,

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defined as the sum of consumer
surplus plus producer surplus.

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But once again, I cannot
highlight enough the depth

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of this insight.

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That this point which before
today, you knew as the outcome.

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I showed you in
the first lecture

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this is what happens when
you have supply and demand.

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You get to this equilibrium
that happens to be

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the very best place to be.

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And that's why we call it the
first fundamental theorem.

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It's very important.

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Yeah?

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AUDIENCE: But the idea
then of since we're

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caring about social worth, even
though the consumers are better

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off, there is not as many
trades because the consumers

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don't get as much out of it?

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JONATHAN GRUBER: I
want to come to that.

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Let's talk about that.

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Let's go to another
example to talk about that.

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Let's talk about interventions.

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Let's do it.

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Let's do an example.

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That was just to teach
you the basic idea,

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but let's go on to a
more explicit example

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of a government intervention.

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Actually, I'll do it here.

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Let me do an explicit example
of a government intervention.

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And that will
address the question

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which was just asked because I
skipped over a key point, here.

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I'm always not sure the right
order to teach these things.

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So let's take
example of a market.

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Let's consider the
market for gas.

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So go to Figure 10-2.

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This is a market we talked about
before, the market for gas.

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Imagine the market
for gas is initially

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00:09:45,080 --> 00:09:51,300
in equilibrium with supply
curve S1 and a demand curve D.

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And it's initially in
equilibrium at point little e1,

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with Q1 gallons of gas
being sold at a price P1.

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That's initial equilibrium.

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Now, imagine that
there is an oil crisis

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00:10:06,645 --> 00:10:08,520
because, for example,
the oil company decided

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00:10:08,520 --> 00:10:09,610
it would be good
idea to drill eight

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00:10:09,610 --> 00:10:11,050
miles underground horizontally.

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And it busts, and
there are spills

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everywhere--
something like that,

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some random example like that.

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And there's a supply crisis.

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What happens now is
suddenly, it gets

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00:10:21,580 --> 00:10:24,130
more expensive to produce gas.

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00:10:24,130 --> 00:10:25,930
So the supply curve
shifts upwards--

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00:10:25,930 --> 00:10:28,250
we talked about this last time--

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00:10:28,250 --> 00:10:30,463
leading us to a new
equilibrium at point E2.

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And you remember,
we talked about how

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00:10:32,005 --> 00:10:32,930
the equilibrium works.

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00:10:32,930 --> 00:10:34,910
Initially, if we think
about it in steps,

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initially you've
created an excess demand

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00:10:37,280 --> 00:10:38,780
because gas companies
no longer want

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to supply Q1 gallons at a price
P1 from their new supply curve.

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00:10:46,130 --> 00:10:48,620
So you shift along
the demand curve

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00:10:48,620 --> 00:10:52,020
to the new point E2, which
is a new equilibrium.

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00:10:52,020 --> 00:10:53,730
And all is well and good.

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Prices go up.

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00:10:54,840 --> 00:10:58,920
That's what happened after Deep
Water and things like that.

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Now, imagine the government
doesn't like that.

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00:11:01,330 --> 00:11:03,630
Imagine the government says,
well, we don't like that.

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00:11:03,630 --> 00:11:05,460
We don't like the fact consumers
have to pay more for gas.

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00:11:05,460 --> 00:11:06,960
Consumers vote us
out of office when

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00:11:06,960 --> 00:11:08,640
they have to pay more for gas.

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00:11:08,640 --> 00:11:11,820
So we are going to solve this
by imposing a price ceiling.

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00:11:11,820 --> 00:11:13,560
We are going to announce
the price of gas

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00:11:13,560 --> 00:11:16,215
must remain at its old level P1.

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00:11:19,935 --> 00:11:21,060
So let's go to Figure 10-3.

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00:11:23,710 --> 00:11:27,058
Figure 10-3 shows what happens
when the government imposes

254
00:11:27,058 --> 00:11:27,850
that price ceiling.

255
00:11:30,640 --> 00:11:33,340
Well, the first question
is if the government

256
00:11:33,340 --> 00:11:36,610
imposes a price ceiling
of P1, how much actually

257
00:11:36,610 --> 00:11:37,780
gets sold in the market?

258
00:11:37,780 --> 00:11:40,580
This comes to the question
that was just asked.

259
00:11:40,580 --> 00:11:44,340
Well, this is sort of a
new thing we've looked at,

260
00:11:44,340 --> 00:11:47,060
which is we have the situation
where there's excess demand.

261
00:11:47,060 --> 00:11:52,390
At the price P1, consumers
still want Q little d.

262
00:11:52,390 --> 00:11:56,050
But suppliers are only willing
to supply Qs, Q little s.

263
00:11:56,050 --> 00:11:56,890
See?

264
00:11:56,890 --> 00:12:00,450
Consumers still are working
off the same demand curve.

265
00:12:00,450 --> 00:12:03,020
If the government says we
still want the price to be P1,

266
00:12:03,020 --> 00:12:03,520
they're like, great.

267
00:12:03,520 --> 00:12:05,312
We still want as much
gas as we had before.

268
00:12:05,312 --> 00:12:06,482
Supplies are like, no way.

269
00:12:06,482 --> 00:12:07,690
We're not going to supply it.

270
00:12:07,690 --> 00:12:08,950
If you're going to keep
the price at that level,

271
00:12:08,950 --> 00:12:11,080
we're going to produce
less gas because we

272
00:12:11,080 --> 00:12:12,560
have a rising marginal cost.

273
00:12:12,560 --> 00:12:14,560
So if you're going to
force out that same price,

274
00:12:14,560 --> 00:12:16,870
we're going to work our way
back down the supply curve

275
00:12:16,870 --> 00:12:18,370
and produce less gas.

276
00:12:18,370 --> 00:12:22,660
So suddenly, you have a
situation of excess demand

277
00:12:22,660 --> 00:12:23,898
that doesn't get resolved.

278
00:12:23,898 --> 00:12:26,190
Remember, last time, we said
excess demand got resolved

279
00:12:26,190 --> 00:12:27,440
by moving up the demand curve.

280
00:12:27,440 --> 00:12:28,483
Well, you can't, here.

281
00:12:28,483 --> 00:12:30,150
You can't resolve
that because the price

282
00:12:30,150 --> 00:12:33,510
is forced to be at P1.

283
00:12:33,510 --> 00:12:36,080
Now, what determines what
actually gets sold when

284
00:12:36,080 --> 00:12:37,500
there's a price restriction?

285
00:12:37,500 --> 00:12:39,610
Here's the way I
like to think of it.

286
00:12:39,610 --> 00:12:42,660
I like to think of the
actual quantity gets

287
00:12:42,660 --> 00:12:44,910
set by the constrained party.

288
00:12:44,910 --> 00:12:47,850
So in this case, a
price ceiling means

289
00:12:47,850 --> 00:12:50,910
that suppliers want
or are asked to supply

290
00:12:50,910 --> 00:12:54,280
more than they're willing
to, so they just say no.

291
00:12:54,280 --> 00:12:58,150
So you actually get the ultimate
quantity in the market is Qs.

292
00:12:58,150 --> 00:13:00,640
It doesn't matter that
demanders want Qd.

293
00:13:00,640 --> 00:13:02,920
They can't buy stuff
that's not produced.

294
00:13:02,920 --> 00:13:04,390
Likewise, we'll
do examples later

295
00:13:04,390 --> 00:13:10,950
with a price floor,
where consumers want less

296
00:13:10,950 --> 00:13:12,590
than suppliers want to provide.

297
00:13:12,590 --> 00:13:15,068
Then, it's consumers that
decide what gets sold.

298
00:13:15,068 --> 00:13:16,610
So basically, whoever
wants less gets

299
00:13:16,610 --> 00:13:18,380
to decide because
you can't force

300
00:13:18,380 --> 00:13:19,680
the producers to produce more.

301
00:13:19,680 --> 00:13:22,310
We have a private oil
industry, gas industry.

302
00:13:22,310 --> 00:13:28,370
So you end up with Qs units
of gas sold at a price P1.

303
00:13:28,370 --> 00:13:34,110
So what the price ceiling does
is move you from E1 to E3.

304
00:13:34,110 --> 00:13:36,980
You would have moved to
E2 without the government

305
00:13:36,980 --> 00:13:37,910
intervention.

306
00:13:37,910 --> 00:13:39,290
Instead, it moves you to E3.

307
00:13:42,370 --> 00:13:46,510
And as a result, you
end up with consumers--

308
00:13:46,510 --> 00:13:55,130
consumer surplus-- being A plus
C, producer surplus being E,

309
00:13:55,130 --> 00:13:56,898
and relative to an
unconstrained world,

310
00:13:56,898 --> 00:13:58,940
not relative to the world
before, but relative to

311
00:13:58,940 --> 00:14:00,540
without government
intervention, you

312
00:14:00,540 --> 00:14:02,883
have a deadweight loss
of B plus D. Yeah?

313
00:14:02,883 --> 00:14:05,565
AUDIENCE: Why can't [INAUDIBLE]
by producing stuff yourself?

314
00:14:05,565 --> 00:14:07,690
JONATHAN GRUBER: Well,
that's a very deep question.

315
00:14:07,690 --> 00:14:09,340
As I said, that we don't have
a nationalized gas industry.

316
00:14:09,340 --> 00:14:10,840
We just have a
private gas industry.

317
00:14:10,840 --> 00:14:12,280
There's a separate issue of--

318
00:14:12,280 --> 00:14:15,100
a larger issue about whether
private or public sector

319
00:14:15,100 --> 00:14:16,420
should be producing things.

320
00:14:16,420 --> 00:14:18,837
And that's beyond the scope
of what we're discussing here.

321
00:14:18,837 --> 00:14:20,462
But for now, assume
the government just

322
00:14:20,462 --> 00:14:22,690
has a regulatory role,
not a gas production role.

323
00:14:22,690 --> 00:14:23,530
The government, by
the way, does have

324
00:14:23,530 --> 00:14:24,490
a little of a gas
production role

325
00:14:24,490 --> 00:14:25,540
because the government
actually has something called

326
00:14:25,540 --> 00:14:28,480
the Strategic Oil Reserve where
they have millions of barrels

327
00:14:28,480 --> 00:14:30,825
they can actually
release and release

328
00:14:30,825 --> 00:14:32,200
onto the market
at certain times.

329
00:14:32,200 --> 00:14:34,370
The government does have a
way to try to deal with this.

330
00:14:34,370 --> 00:14:36,120
But for now, let's
assume that they're not

331
00:14:36,120 --> 00:14:39,490
going to use the Strategic
Reserve, just regulate price.

332
00:14:39,490 --> 00:14:41,590
So they regulate price.

333
00:14:41,590 --> 00:14:46,660
And what they've done is they've
created a deadweight loss.

334
00:14:46,660 --> 00:14:50,480
So basically, if
we think about it,

335
00:14:50,480 --> 00:14:53,140
what are the costs and benefits
of government intervention?

336
00:14:53,140 --> 00:14:56,740
The costs of government
intervention are twofold.

337
00:14:56,740 --> 00:14:59,420
What are the costs of
this price ceiling?

338
00:14:59,420 --> 00:15:00,170
There's two costs.

339
00:15:00,170 --> 00:15:05,890
Cost one is you've
created an inefficiency.

340
00:15:05,890 --> 00:15:08,390
You've just created
this deadweight loss

341
00:15:08,390 --> 00:15:12,550
because basically, if you
didn't restrict things,

342
00:15:12,550 --> 00:15:15,360
there are people who
would have bought gas

343
00:15:15,360 --> 00:15:19,440
to the right of Q sub S
and to the left of E2.

344
00:15:19,440 --> 00:15:22,080
Those units between
Q sub S and E2,

345
00:15:22,080 --> 00:15:24,570
where E2 intersects
the x-axis, those

346
00:15:24,570 --> 00:15:27,310
are units where the consumer
surplus plus the producer

347
00:15:27,310 --> 00:15:28,770
surplus is positive.

348
00:15:28,770 --> 00:15:29,280
Right?

349
00:15:29,280 --> 00:15:31,280
You look at the unit right
to the right of Q sub

350
00:15:31,280 --> 00:15:36,330
S. That's a unit that consumers
would have happily bought

351
00:15:36,330 --> 00:15:38,820
at the new higher price and
producers would have happily

352
00:15:38,820 --> 00:15:40,820
sold at the new higher
price, but the government

353
00:15:40,820 --> 00:15:42,090
isn't letting it happen.

354
00:15:42,090 --> 00:15:44,290
So that's a deadweight loss.

355
00:15:44,290 --> 00:15:46,720
So that's an inefficiency.

356
00:15:46,720 --> 00:15:49,410
So that's the first cost--

357
00:15:49,410 --> 00:15:52,260
the cost to society of
trades that don't get made.

358
00:15:52,260 --> 00:15:59,070
And we call this
an efficiency loss

359
00:15:59,070 --> 00:16:02,220
because there are
efficient trades.

360
00:16:02,220 --> 00:16:04,560
Things are efficient
if they make

361
00:16:04,560 --> 00:16:07,745
the whole-- the joint surplus
is positive, if on net, people

362
00:16:07,745 --> 00:16:08,370
are better off.

363
00:16:08,370 --> 00:16:12,680
They're efficient trades which
both sides were happy to make,

364
00:16:12,680 --> 00:16:13,620
and they can't make.

365
00:16:13,620 --> 00:16:16,380
So we call this an
efficiency loss.

366
00:16:16,380 --> 00:16:20,650
But that's not the only
cost to this policy.

367
00:16:20,650 --> 00:16:21,670
What's the other cost?

368
00:16:21,670 --> 00:16:23,100
This is a hard question.

369
00:16:23,100 --> 00:16:23,948
Yeah?

370
00:16:23,948 --> 00:16:25,990
AUDIENCE: Do we have to
force the price to not be

371
00:16:25,990 --> 00:16:27,990
[INAUDIBLE] what
it'd normally be?

372
00:16:27,990 --> 00:16:28,920
JONATHAN GRUBER: Yeah,
so there's enforcement.

373
00:16:28,920 --> 00:16:30,420
You have to go around and
send regulators around

374
00:16:30,420 --> 00:16:31,440
to gas stations,
make sure they're

375
00:16:31,440 --> 00:16:32,970
not charging the wrong price.

376
00:16:32,970 --> 00:16:33,720
That's true.

377
00:16:33,720 --> 00:16:35,543
I sort of say that's small.

378
00:16:35,543 --> 00:16:37,710
Let's think more of a
theoretical-- not theoretical,

379
00:16:37,710 --> 00:16:39,930
but what's the other
big source of--

380
00:16:39,930 --> 00:16:40,550
yeah?

381
00:16:40,550 --> 00:16:42,120
AUDIENCE: Isn't it
the loss to producers?

382
00:16:42,120 --> 00:16:43,885
There's no new producers
wanting to innovate

383
00:16:43,885 --> 00:16:44,360
and stuff like that?

384
00:16:44,360 --> 00:16:45,390
JONATHAN GRUBER: There's
sort of a dynamic.

385
00:16:45,390 --> 00:16:46,410
But once again,
the producers think

386
00:16:46,410 --> 00:16:47,700
this may be a short-run thing.

387
00:16:47,700 --> 00:16:50,640
And once the Deepwater
Horizon gets fixed,

388
00:16:50,640 --> 00:16:54,030
prices will be back
down or whatever.

389
00:16:54,030 --> 00:16:57,837
But what's the other miracle of
the market that we lose here?

390
00:16:57,837 --> 00:16:59,670
We talked about this
the very first lecture.

391
00:16:59,670 --> 00:17:00,140
Yeah?

392
00:17:00,140 --> 00:17:02,057
AUDIENCE: It felt like,
related to [INAUDIBLE]

393
00:17:02,057 --> 00:17:03,280
entering and exiting?

394
00:17:03,280 --> 00:17:04,200
JONATHAN GRUBER: No,
there's entry and exit.

395
00:17:04,200 --> 00:17:05,880
But once again, let's rule out
[INAUDIBLE] because it's just

396
00:17:05,880 --> 00:17:07,050
a short-run deal.

397
00:17:07,050 --> 00:17:08,224
Yeah?

398
00:17:08,224 --> 00:17:10,864
AUDIENCE: Is it like how do
you ensure that the people who

399
00:17:10,864 --> 00:17:11,755
value it the most--

400
00:17:11,755 --> 00:17:12,630
JONATHAN GRUBER: Yes.

401
00:17:12,630 --> 00:17:15,630
There is allocative
inefficiency.

402
00:17:15,630 --> 00:17:18,089
Remember, one of the
things we talked about

403
00:17:18,089 --> 00:17:21,030
in the very first lecture--

404
00:17:21,030 --> 00:17:22,260
I think we did.

405
00:17:22,260 --> 00:17:23,140
Maybe not.

406
00:17:23,140 --> 00:17:26,670
Anyway, one of the
most important benefits

407
00:17:26,670 --> 00:17:28,410
of the competitive equilibrium--

408
00:17:28,410 --> 00:17:30,480
it doesn't just deliver
the right quantity,

409
00:17:30,480 --> 00:17:34,220
it delivers it to the
people who want it the most.

410
00:17:34,220 --> 00:17:36,190
So let's go back to figure 10-2.

411
00:17:36,190 --> 00:17:37,900
It's easy to see there.

412
00:17:37,900 --> 00:17:42,275
If you think about who gets gas
at the initial equilibrium E1.

413
00:17:42,275 --> 00:17:43,270
And actually, no.

414
00:17:43,270 --> 00:17:44,170
But let's go 10-3.

415
00:17:44,170 --> 00:17:45,100
That's fine.

416
00:17:45,100 --> 00:17:48,100
So let's say we
hadn't interfered,

417
00:17:48,100 --> 00:17:50,840
and we'd allowed the
price to go to E2.

418
00:17:50,840 --> 00:17:53,200
Well, fewer people would
have bought gas, right?

419
00:17:53,200 --> 00:17:56,876
The quantity would
have fallen from Qd--

420
00:17:56,876 --> 00:17:59,560
would have fallen all
the way from E1 to E2.

421
00:17:59,560 --> 00:18:02,020
But the people who dropped
out would have been who?

422
00:18:02,020 --> 00:18:04,750
The people who
valued gas the least,

423
00:18:04,750 --> 00:18:06,760
the people who got the
lowest surplus from it.

424
00:18:09,470 --> 00:18:15,060
However, now, suddenly, you
only have Qs units of gas,

425
00:18:15,060 --> 00:18:17,690
and you have Qd
people who want them.

426
00:18:17,690 --> 00:18:20,130
Well now, who decides
who gets them?

427
00:18:20,130 --> 00:18:22,080
Before, the market
did the magic.

428
00:18:22,080 --> 00:18:25,650
The market made sure the people
who wanted the units got them.

429
00:18:25,650 --> 00:18:28,020
Now, all of a sudden,
something else has to decide.

430
00:18:28,020 --> 00:18:29,700
So how do you resolve this?

431
00:18:29,700 --> 00:18:31,860
Well, we actually
an answer to this.

432
00:18:31,860 --> 00:18:33,840
We had a gas crisis
in the 1970s.

433
00:18:33,840 --> 00:18:35,760
And the government
imposed a price ceiling.

434
00:18:35,760 --> 00:18:36,927
And how did it get resolved?

435
00:18:36,927 --> 00:18:38,660
How did we decide
then who got the gas?

436
00:18:38,660 --> 00:18:39,780
Does anyone know?

437
00:18:39,780 --> 00:18:41,470
Raise your hand and
tell me if you know.

438
00:18:41,470 --> 00:18:42,106
Yeah?

439
00:18:42,106 --> 00:18:44,365
AUDIENCE: [INAUDIBLE]

440
00:18:44,365 --> 00:18:45,990
JONATHAN GRUBER:
People waited in line.

441
00:18:45,990 --> 00:18:50,280
People basically sat in their
cars and waited in line.

442
00:18:50,280 --> 00:18:54,610
Now, so essentially,
if you think about it,

443
00:18:54,610 --> 00:18:57,790
goods are going to
get allocated somehow.

444
00:18:57,790 --> 00:18:59,290
If the market doesn't
allocate them,

445
00:18:59,290 --> 00:19:04,340
there'll be another less
efficient allocation mechanism.

446
00:19:04,340 --> 00:19:07,520
And basically, why
is it inefficient

447
00:19:07,520 --> 00:19:10,592
that people waited
in line for gas?

448
00:19:10,592 --> 00:19:11,800
There's actually two reasons.

449
00:19:11,800 --> 00:19:12,390
One is sort of cute.

450
00:19:12,390 --> 00:19:14,640
But what's the main reason
it's inefficient for people

451
00:19:14,640 --> 00:19:16,400
to be waiting in line for gas?

452
00:19:16,400 --> 00:19:17,550
Yeah?

453
00:19:17,550 --> 00:19:19,550
AUDIENCE: They're
wasting [INAUDIBLE]..

454
00:19:19,550 --> 00:19:22,960
JONATHAN GRUBER: Yes,
the opportunity cost.

455
00:19:22,960 --> 00:19:25,030
Point little 1, you have
the opportunity cost.

456
00:19:28,240 --> 00:19:30,670
You have the fact that that
time I spent waiting in line,

457
00:19:30,670 --> 00:19:32,733
I could have been
working or having fun,

458
00:19:32,733 --> 00:19:34,900
but certainly something I
would've enjoyed more than

459
00:19:34,900 --> 00:19:35,900
waiting in line for gas.

460
00:19:35,900 --> 00:19:37,867
I think we'd all
agree that there's

461
00:19:37,867 --> 00:19:39,700
something we'd rather
be doing with our time

462
00:19:39,700 --> 00:19:42,370
than waiting in line for gas.

463
00:19:42,370 --> 00:19:44,370
Unless you really like
the music in your car

464
00:19:44,370 --> 00:19:45,620
stereo, and you can't
listen anywhere else.

465
00:19:45,620 --> 00:19:47,162
I don't know what
the story would be.

466
00:19:47,162 --> 00:19:49,330
But I can't imagine
that many of us

467
00:19:49,330 --> 00:19:51,070
would prefer to wait in line
for gas than do something else.

468
00:19:51,070 --> 00:19:52,403
So there's the opportunity cost.

469
00:19:52,403 --> 00:19:54,370
That's an inefficiency.

470
00:19:54,370 --> 00:19:58,750
Society is losing out because
you are not using your time

471
00:19:58,750 --> 00:20:00,670
in the most productive way--

472
00:20:00,670 --> 00:20:04,370
in the way that
maximizes your welfare.

473
00:20:04,370 --> 00:20:04,870
What else?

474
00:20:04,870 --> 00:20:07,780
What's the other
small, other cost?

475
00:20:07,780 --> 00:20:08,280
Yeah?

476
00:20:08,280 --> 00:20:10,155
AUDIENCE: Isn't waiting
in line [INAUDIBLE]??

477
00:20:10,155 --> 00:20:12,670
JONATHAN GRUBER: Yeah, people
used gas waiting in line.

478
00:20:12,670 --> 00:20:15,268
So there's literally the
technical inefficiency.

479
00:20:17,960 --> 00:20:20,437
And remember, this is back
when cars got like 8 miles

480
00:20:20,437 --> 00:20:21,020
to the gallon.

481
00:20:21,020 --> 00:20:22,340
So you'd get to the
front line, get gas,

482
00:20:22,340 --> 00:20:23,450
and have to go back to
the back of the line

483
00:20:23,450 --> 00:20:25,072
again because you
used so much gas,

484
00:20:25,072 --> 00:20:26,780
plus not to mention
the pollution and all

485
00:20:26,780 --> 00:20:28,070
that other stuff.

486
00:20:28,070 --> 00:20:30,770
So basically, this
is the inefficiency

487
00:20:30,770 --> 00:20:34,903
from a non-market
allocation mechanism, which

488
00:20:34,903 --> 00:20:37,070
is that people could be
doing more productive things

489
00:20:37,070 --> 00:20:39,170
and not wasting gas
waiting in line.

490
00:20:39,170 --> 00:20:39,723
Yeah?

491
00:20:39,723 --> 00:20:43,660
AUDIENCE: Is the excess
of demand Qs minus Qd,

492
00:20:43,660 --> 00:20:45,810
or Qs minus E2?

493
00:20:45,810 --> 00:20:47,120
JONATHAN GRUBER: No, Qd--

494
00:20:47,120 --> 00:20:50,350
because we fixed the price
of P1, so it's Qd minus--

495
00:20:50,350 --> 00:20:53,180
since we fixed the price
of P1, people want--

496
00:20:53,180 --> 00:20:55,245
what's the demand at that price?

497
00:20:55,245 --> 00:20:56,870
Qd, but it's supplied
at that price Qs.

498
00:20:56,870 --> 00:20:59,950
So that's the excess demand.

499
00:20:59,950 --> 00:21:01,870
So now, yeah?

500
00:21:01,870 --> 00:21:04,070
AUDIENCE: You mentioned
how the market makes sure

501
00:21:04,070 --> 00:21:06,112
that people who want the
gas the most can get it.

502
00:21:06,112 --> 00:21:08,768
But isn't the one thing it
involves like however much

503
00:21:08,768 --> 00:21:10,060
they're willing to spend on it?

504
00:21:10,060 --> 00:21:12,250
So does this market
assume that all people

505
00:21:12,250 --> 00:21:13,700
make the same amount of income?

506
00:21:13,700 --> 00:21:15,033
JONATHAN GRUBER: No, it doesn't.

507
00:21:15,033 --> 00:21:18,070
But it does assume that
basically, the market--

508
00:21:18,070 --> 00:21:20,230
and this comes to the tradeoff.

509
00:21:20,230 --> 00:21:23,600
What's the benefit
of this policy?

510
00:21:23,600 --> 00:21:28,280
Which you've raised with your
question, which is equity.

511
00:21:28,280 --> 00:21:30,378
I've defined consumer
surplus as simply

512
00:21:30,378 --> 00:21:31,670
being what the market delivers.

513
00:21:31,670 --> 00:21:34,310
So basically, rich guys
have more consumer surplus

514
00:21:34,310 --> 00:21:36,680
than poor guys.

515
00:21:36,680 --> 00:21:39,800
That might not seem
fair to people.

516
00:21:39,800 --> 00:21:44,780
As a result, the benefit is
equity, which is that if you--

517
00:21:44,780 --> 00:21:46,940
that everyone gets
gas at a lower price.

518
00:21:46,940 --> 00:21:49,280
Rather than the price rising,
the people who drop out

519
00:21:49,280 --> 00:21:51,800
may actually not be the people
who don't need to drive.

520
00:21:51,800 --> 00:21:54,533
They're people who can't afford
to drive, so they drop out.

521
00:21:54,533 --> 00:21:56,450
Remember, where does the
main curve come from?

522
00:21:56,450 --> 00:21:57,908
It comes from
utility maximization.

523
00:21:57,908 --> 00:22:00,230
That's a constrained
maximization.

524
00:22:00,230 --> 00:22:02,920
So the people who drop
out may be people we want.

525
00:22:02,920 --> 00:22:05,720
Maybe they're people who have
to lose their jobs because they

526
00:22:05,720 --> 00:22:07,310
can't drive to
their jobs anymore.

527
00:22:07,310 --> 00:22:08,600
That's unfortunate.

528
00:22:08,600 --> 00:22:11,510
So basically, the benefit
of this is equity.

529
00:22:11,510 --> 00:22:14,150
And that raises something
we're going to come back

530
00:22:14,150 --> 00:22:17,900
to over and over again in this
class, which is what we call

531
00:22:17,900 --> 00:22:21,113
the equity-efficiency tradeoff.

532
00:22:21,113 --> 00:22:23,030
The equity-efficiency
tradeoff, which is there

533
00:22:23,030 --> 00:22:27,410
are many government policies
which make society more equal,

534
00:22:27,410 --> 00:22:30,595
but along the way
deliver deadweight loss.

535
00:22:30,595 --> 00:22:32,470
And I'll actually tell
you later in the class

536
00:22:32,470 --> 00:22:35,340
how to optimize
across that problem--

537
00:22:35,340 --> 00:22:38,150
how to optimize across the
tradeoff between equity

538
00:22:38,150 --> 00:22:39,050
and efficiency.

539
00:22:39,050 --> 00:22:41,050
But for right now, I just
need you to understand

540
00:22:41,050 --> 00:22:43,310
that there's a tradeoff.

541
00:22:43,310 --> 00:22:43,840
Yeah?

542
00:22:43,840 --> 00:22:46,910
AUDIENCE: [INAUDIBLE] equity.

543
00:22:46,910 --> 00:22:50,753
Like [INAUDIBLE] let the
people who [INAUDIBLE]

544
00:22:50,753 --> 00:22:52,910
because if there's
no price ceiling,

545
00:22:52,910 --> 00:22:55,190
then the people who are
able to pay the most money

546
00:22:55,190 --> 00:22:56,178
will get it, right?

547
00:22:56,178 --> 00:22:57,470
JONATHAN GRUBER: Yeah, exactly.

548
00:22:57,470 --> 00:22:58,370
So the point is--

549
00:22:58,370 --> 00:23:00,370
right, the people who--
was there more to your--

550
00:23:00,370 --> 00:23:00,953
AUDIENCE: Yes.

551
00:23:00,953 --> 00:23:03,090
But if there's a
price ceiling, then

552
00:23:03,090 --> 00:23:06,968
wouldn't it just [INAUDIBLE]?

553
00:23:06,968 --> 00:23:08,010
JONATHAN GRUBER: Exactly.

554
00:23:08,010 --> 00:23:10,130
At issue is a different
kind of inequity.

555
00:23:10,130 --> 00:23:11,322
So if you're worried about--

556
00:23:11,322 --> 00:23:13,280
so in some sense, the
rich guy would say, well,

557
00:23:13,280 --> 00:23:15,170
that's not fair to
me, Just because I've

558
00:23:15,170 --> 00:23:17,450
got a productive job
I could be doing.

559
00:23:17,450 --> 00:23:19,450
And someone else has extra time.

560
00:23:19,450 --> 00:23:21,200
Why should they get
the gas instead of me?

561
00:23:21,200 --> 00:23:21,867
So you're right.

562
00:23:21,867 --> 00:23:24,135
There's always an inequity.

563
00:23:24,135 --> 00:23:25,010
That's a great point.

564
00:23:25,010 --> 00:23:28,205
When I say "equity," I
implicitly mean what we call--

565
00:23:28,205 --> 00:23:29,580
ethics is a very
important point.

566
00:23:29,580 --> 00:23:31,670
Whenever I say equity
in this course,

567
00:23:31,670 --> 00:23:37,280
I implicitly mean what
we call vertical equity.

568
00:23:37,280 --> 00:23:40,800
Vertical equity is
rich versus poor.

569
00:23:40,800 --> 00:23:44,350
There are other kinds of
equity you might care about

570
00:23:44,350 --> 00:23:49,910
like who has extra time versus
who doesn't have extra time.

571
00:23:49,910 --> 00:23:50,990
And that's a good point.

572
00:23:50,990 --> 00:23:52,000
But for now, when
I say equity, I'm

573
00:23:52,000 --> 00:23:52,960
only thinking about
rich versus poor.

574
00:23:52,960 --> 00:23:53,690
When we're thinking
about government policy

575
00:23:53,690 --> 00:23:55,240
and the equity-efficiency
tradeoff,

576
00:23:55,240 --> 00:23:58,570
we're really thinking
about vertical equity.

577
00:23:58,570 --> 00:24:01,613
Other questions about that?

578
00:24:01,613 --> 00:24:03,030
So let's do a
couple more examples

579
00:24:03,030 --> 00:24:05,370
to drill this intuition home.

580
00:24:05,370 --> 00:24:08,330
Let's do a couple more
examples because this

581
00:24:08,330 --> 00:24:10,760
is a very important point.

582
00:24:10,760 --> 00:24:13,220
Example A-- let's talk
about ticket scalping.

583
00:24:15,900 --> 00:24:18,690
I love going to music concerts.

584
00:24:18,690 --> 00:24:21,540
I went to my 51st concert
of the year last year--

585
00:24:21,540 --> 00:24:22,500
last night, sorry.

586
00:24:22,500 --> 00:24:23,530
Went to my 51st
concert of the year.

587
00:24:23,530 --> 00:24:25,238
I love going to music
concerts, so I know

588
00:24:25,238 --> 00:24:27,240
a lot about the music business.

589
00:24:27,240 --> 00:24:29,220
And ticket scalping at
concerts is a big deal.

590
00:24:29,220 --> 00:24:30,060
For those of you who
don't know the term,

591
00:24:30,060 --> 00:24:32,760
this is the idea of
buying tickets essentially

592
00:24:32,760 --> 00:24:35,080
on a secondary market.

593
00:24:35,080 --> 00:24:37,050
So let's use the
example of Adele.

594
00:24:37,050 --> 00:24:40,650
So Adele, about two
years ago, went on tour

595
00:24:40,650 --> 00:24:43,020
for the first time in
four years to back up

596
00:24:43,020 --> 00:24:44,455
an incredibly successful album.

597
00:24:44,455 --> 00:24:46,080
And folks really
wanted to see her life

598
00:24:46,080 --> 00:24:46,980
because she had a big fan base.

599
00:24:46,980 --> 00:24:47,760
She was quiet for a while.

600
00:24:47,760 --> 00:24:48,630
She made an album.

601
00:24:48,630 --> 00:24:50,580
People really wanted
to see her live.

602
00:24:50,580 --> 00:24:53,100
She wanted to make sure her
fans could afford to see her.

603
00:24:53,100 --> 00:24:55,290
So what she did is
she said, I'm going

604
00:24:55,290 --> 00:24:58,620
to price many tickets for
$40 and the highest tickets

605
00:24:58,620 --> 00:25:01,710
at $150, which is
really, really cheap.

606
00:25:01,710 --> 00:25:03,960
So my daughter's going
to see J. Cole tonight.

607
00:25:03,960 --> 00:25:09,180
And she's paying like $150 for a
mediocre ticket, so $40 to $150

608
00:25:09,180 --> 00:25:11,783
is really cheap.

609
00:25:11,783 --> 00:25:13,950
But she's saying, I want
to deliver consumer surplus

610
00:25:13,950 --> 00:25:14,490
to my fans.

611
00:25:14,490 --> 00:25:16,950
I want to make sure
my fans can really

612
00:25:16,950 --> 00:25:19,290
enjoy this and get surplus.

613
00:25:19,290 --> 00:25:20,850
But what happened?

614
00:25:20,850 --> 00:25:23,490
Well, what happened is that the
tickets sold out instantly--

615
00:25:23,490 --> 00:25:26,580
like, literally instantaneously.

616
00:25:26,580 --> 00:25:29,100
And the major
purchasers were what

617
00:25:29,100 --> 00:25:32,400
we call scalpers, who are
essentially professionals

618
00:25:32,400 --> 00:25:35,730
who buy tickets and
then resell them on what

619
00:25:35,730 --> 00:25:37,020
we call the secondary market.

620
00:25:37,020 --> 00:25:39,120
You might have heard of
StubHub or other sites

621
00:25:39,120 --> 00:25:40,860
like that, where you
essentially go on

622
00:25:40,860 --> 00:25:44,460
and buy tickets to
sold-out events.

623
00:25:44,460 --> 00:25:46,930
And the prices on
StubHub were much higher.

624
00:25:46,930 --> 00:25:49,200
It was about $1,500
for good ticket--

625
00:25:49,200 --> 00:25:52,500
about 10 times what
she'd set the price at.

626
00:25:52,500 --> 00:25:56,610
So basically, who's
getting the surplus?

627
00:25:56,610 --> 00:25:59,550
Not the fans, the scalpers--

628
00:25:59,550 --> 00:26:02,160
the people who were quick enough
to get online who had bots

629
00:26:02,160 --> 00:26:04,008
set up, so that the
second it went online,

630
00:26:04,008 --> 00:26:05,550
they went online
and got the tickets.

631
00:26:05,550 --> 00:26:07,615
They had thousands of
bots set up, essentially.

632
00:26:07,615 --> 00:26:09,990
Somehow, they got around the
"click this if you're human"

633
00:26:09,990 --> 00:26:10,490
box.

634
00:26:10,490 --> 00:26:11,820
I don't know how they do that.

635
00:26:11,820 --> 00:26:13,710
But essentially, I'm sure
it's smart programmers.

636
00:26:13,710 --> 00:26:15,377
You guys can probably
do that in an hour

637
00:26:15,377 --> 00:26:17,300
as an extra-credit project.

638
00:26:17,300 --> 00:26:18,800
They got around it,
and they bought.

639
00:26:18,800 --> 00:26:20,370
And so essentially,
Adele actually

640
00:26:20,370 --> 00:26:23,415
didn't create
surplus for her fans.

641
00:26:23,415 --> 00:26:24,790
She created surplus
for scalpers.

642
00:26:27,370 --> 00:26:30,290
Now, it didn't used
to be this way.

643
00:26:30,290 --> 00:26:32,970
When I was a kid, we didn't
have a secondary market.

644
00:26:32,970 --> 00:26:35,430
We waited on line.

645
00:26:35,430 --> 00:26:38,570
So when I saw my first
concert in 1981--

646
00:26:38,570 --> 00:26:39,740
can you guys believe that?

647
00:26:39,740 --> 00:26:41,405
In 1981, I saw The Cars.

648
00:26:41,405 --> 00:26:43,238
How many of you guys
have heard of The Cars?

649
00:26:43,238 --> 00:26:45,230
Oh, god.

650
00:26:45,230 --> 00:26:48,070
Anyway, I saw The Cars, and I
had to wait on line for hours

651
00:26:48,070 --> 00:26:52,640
to get tickets because that
was the allocation mechanism.

652
00:26:52,640 --> 00:26:56,920
So let's think about whether
life is better or worse.

653
00:26:56,920 --> 00:27:00,580
Because on the one hand,
scalpers get money.

654
00:27:00,580 --> 00:27:03,435
On the other hand, people don't
waste time waiting on line.

655
00:27:03,435 --> 00:27:05,560
So it really comes down to
the same equity tradeoff

656
00:27:05,560 --> 00:27:08,080
we talked about before.

657
00:27:08,080 --> 00:27:08,580
Now.

658
00:27:08,580 --> 00:27:11,430
As a 16-year-old in
1981, I could not

659
00:27:11,430 --> 00:27:14,910
have afforded to pay, probably,
the secondary market price.

660
00:27:14,910 --> 00:27:17,620
But as I was 16, I had
nothing do with my time,

661
00:27:17,620 --> 00:27:21,300
so I was happy to spend
hours waiting on line.

662
00:27:21,300 --> 00:27:23,995
But on the other hand, you could
say someone is very productive,

663
00:27:23,995 --> 00:27:25,620
who is a big fan who
is very productive

664
00:27:25,620 --> 00:27:28,030
and could be out
inventing new products

665
00:27:28,030 --> 00:27:29,520
if they weren't
standing on line.

666
00:27:29,520 --> 00:27:31,228
They might say that's
really inefficient.

667
00:27:31,228 --> 00:27:33,720
I'm happy to pay $1,500
and spend my time inventing

668
00:27:33,720 --> 00:27:37,330
new things, rather than have
to sit around waiting on line.

669
00:27:37,330 --> 00:27:41,910
So it's not clear which is the
better or the worse system.

670
00:27:41,910 --> 00:27:42,670
It's hard to say.

671
00:27:42,670 --> 00:27:43,328
Yeah.

672
00:27:43,328 --> 00:27:45,520
AUDIENCE: [INAUDIBLE].

673
00:27:45,520 --> 00:27:50,770
So like the demand for
[INAUDIBLE] will be only

674
00:27:50,770 --> 00:27:51,900
changing prices and all--

675
00:27:51,900 --> 00:27:54,480
JONATHAN GRUBER: Well,
no, but here's the point--

676
00:27:54,480 --> 00:27:57,210
that's a great point, which
is that, in some sense,

677
00:27:57,210 --> 00:28:01,710
what the scalpers do
is undo Adele's action

678
00:28:01,710 --> 00:28:04,300
and create a truly
efficient market.

679
00:28:04,300 --> 00:28:06,660
So think of the scalpers as
essentially undoing Adele's

680
00:28:06,660 --> 00:28:09,570
action, which
distorted the market.

681
00:28:09,570 --> 00:28:12,150
So you have a market
for Adele tickets

682
00:28:12,150 --> 00:28:14,453
which is at
equilibrium at $1,500.

683
00:28:14,453 --> 00:28:15,870
Adele tried to set
a price ceiling

684
00:28:15,870 --> 00:28:19,760
at $150, seemingly
selfishly, saying,

685
00:28:19,760 --> 00:28:24,582
I'm going to give up
my surplus for my fans.

686
00:28:24,582 --> 00:28:26,540
But unfortunately, it
didn't work out that way.

687
00:28:26,540 --> 00:28:29,180
What happened was the market
re-equilibrated at $1,500,

688
00:28:29,180 --> 00:28:31,880
but that extra surplus
didn't go to Adele.

689
00:28:31,880 --> 00:28:35,180
The consumer surplus still
remained above $1,500.

690
00:28:35,180 --> 00:28:37,728
The difference was that extra
gap between 150 and 1500

691
00:28:37,728 --> 00:28:38,520
didn't go to Adele.

692
00:28:38,520 --> 00:28:39,740
It went to the scalpers.

693
00:28:39,740 --> 00:28:43,933
So it's probably more
efficient than waiting online,

694
00:28:43,933 --> 00:28:45,600
because waiting online
has inefficiency,

695
00:28:45,600 --> 00:28:47,690
whereas instantaneous
bidding is more efficient.

696
00:28:47,690 --> 00:28:51,040
But in some sense,
the efficiency gain

697
00:28:51,040 --> 00:28:54,060
is being delivered not to
consumers, as Adele wanted.

698
00:28:54,060 --> 00:28:57,090
It's being delivered
to scalpers.

699
00:28:57,090 --> 00:29:01,350
So basically, now, there's
another alternative.

700
00:29:01,350 --> 00:29:05,050
What could Adele
have done instead?

701
00:29:05,050 --> 00:29:08,430
What's another way Adele
could've approached this?

702
00:29:08,430 --> 00:29:11,130
She could have auctioned
her tickets online.

703
00:29:11,130 --> 00:29:14,012
She could've said,
look, I know that I

704
00:29:14,012 --> 00:29:15,970
can't manage to deliver
$40 tickets to my fans.

705
00:29:15,970 --> 00:29:17,888
I just can't defeat
the scalper system.

706
00:29:17,888 --> 00:29:19,680
But why should the
scalpers have the money?

707
00:29:19,680 --> 00:29:21,690
I'm going to auction my tickets.

708
00:29:21,690 --> 00:29:24,150
And essentially, she could
have set up an efficient market

709
00:29:24,150 --> 00:29:25,662
online, where people bid.

710
00:29:25,662 --> 00:29:27,870
And then you would have
gotten the efficient outcome.

711
00:29:27,870 --> 00:29:28,710
And you wouldn't wait on line.

712
00:29:28,710 --> 00:29:29,910
You would have bid.

713
00:29:29,910 --> 00:29:32,380
Now, it would've been
inequitable outcome,

714
00:29:32,380 --> 00:29:33,930
but basically, the
same fans would

715
00:29:33,930 --> 00:29:36,685
have gotten the tickets as in
the end got them from scalpers.

716
00:29:36,685 --> 00:29:38,560
But instead of paying
$1,500 to the scalpers,

717
00:29:38,560 --> 00:29:39,760
they'd pay $1,500 to Adele.

718
00:29:39,760 --> 00:29:42,720
And probably that's
a better outcome.

719
00:29:42,720 --> 00:29:44,760
I mean, Adele doesn't
need the money,

720
00:29:44,760 --> 00:29:46,378
but at the end of
the day, if Adele's

721
00:29:46,378 --> 00:29:48,420
generating that amount of
goodwill from her fans,

722
00:29:48,420 --> 00:29:51,750
it seems like she should get the
money, not a bunch of scalpers.

723
00:29:51,750 --> 00:29:53,750
So I guess probably I'd
rather have her have it

724
00:29:53,750 --> 00:29:55,170
than the scalpers.

725
00:29:55,170 --> 00:29:58,330
Now, Ticketmasters tried
to set up auction systems,

726
00:29:58,330 --> 00:30:02,250
recognizing this problem, and
they're not really taking off.

727
00:30:02,250 --> 00:30:04,800
And it sort of
speaks to the fact

728
00:30:04,800 --> 00:30:07,110
that people don't really like
to think about economics.

729
00:30:09,752 --> 00:30:12,210
That basically, people were
like, yeah, but if you auction,

730
00:30:12,210 --> 00:30:13,377
that's ripping off the fans.

731
00:30:13,377 --> 00:30:14,250
That's no fair.

732
00:30:14,250 --> 00:30:15,210
And Ticketmasters
would say, well,

733
00:30:15,210 --> 00:30:16,950
you're getting ripped off
anyway, just by scalpers.

734
00:30:16,950 --> 00:30:18,960
And they said, no, I can
still get online first

735
00:30:18,960 --> 00:30:19,650
and get my ticket.

736
00:30:19,650 --> 00:30:21,600
And people just didn't like
it, thought it was unfair,

737
00:30:21,600 --> 00:30:23,490
even though it's almost
certainly a better outcome

738
00:30:23,490 --> 00:30:25,615
for society that Adele
should have the money rather

739
00:30:25,615 --> 00:30:26,520
than the scalpers.

740
00:30:26,520 --> 00:30:30,390
Which speaks to the fact that
morals matter in markets.

741
00:30:30,390 --> 00:30:33,450
We like the way these markets
abstract amoral concepts,

742
00:30:33,450 --> 00:30:36,030
but morals do matter.

743
00:30:36,030 --> 00:30:40,400
And that basically,
it sort of matters

744
00:30:40,400 --> 00:30:43,050
you sometimes can't do the
right thing because it might not

745
00:30:43,050 --> 00:30:45,030
be the thing that
makes consumers

746
00:30:45,030 --> 00:30:48,720
willing to participate.

747
00:30:48,720 --> 00:30:50,610
So that's one example, scalping.

748
00:30:50,610 --> 00:30:54,660
Another example-- food banks.

749
00:30:54,660 --> 00:30:57,750
Food banks are
organizations which

750
00:30:57,750 --> 00:30:59,140
provide-- oh, yeah, go ahead.

751
00:30:59,140 --> 00:31:02,347
AUDIENCE: What if you
force everyone, I mean,

752
00:31:02,347 --> 00:31:04,930
when you buy a ticket you have
to put your name on the ticket,

753
00:31:04,930 --> 00:31:07,062
so that only you--

754
00:31:07,062 --> 00:31:08,770
JONATHAN GRUBER: I've
thought about that.

755
00:31:08,770 --> 00:31:13,140
So if I could do anything
I wanted in life,

756
00:31:13,140 --> 00:31:14,590
I'd be a rock star.

757
00:31:14,590 --> 00:31:16,798
And I thought if I was a
rock star, it would be cool.

758
00:31:16,798 --> 00:31:19,000
I'd have a concert
for my mega fans,

759
00:31:19,000 --> 00:31:20,753
where they'd have to
prove who they were,

760
00:31:20,753 --> 00:31:22,170
and I'd have a
bracelet and stuff.

761
00:31:22,170 --> 00:31:24,030
It just seems like
it's too hard.

762
00:31:24,030 --> 00:31:26,140
It seems the technology
is just too hard.

763
00:31:26,140 --> 00:31:28,030
So actually, there's
a really cool example.

764
00:31:28,030 --> 00:31:29,447
So I was on the
phone this morning

765
00:31:29,447 --> 00:31:33,630
with rock and roll promoter
who's doing a super cool thing.

766
00:31:33,630 --> 00:31:36,390
So as the election approaches,
I will nag you guys to vote.

767
00:31:36,390 --> 00:31:39,210
Voter turnout among the young
is an enormous problem the US.

768
00:31:39,210 --> 00:31:41,220
So she is running a
series of concerts

769
00:31:41,220 --> 00:31:44,640
around the country where if
you show a picture of yourself

770
00:31:44,640 --> 00:31:47,130
outside a polling place,
you get into the concert

771
00:31:47,130 --> 00:31:49,653
for free, to try to promote
voting among young people.

772
00:31:49,653 --> 00:31:50,320
It's super cool.

773
00:31:50,320 --> 00:31:51,240
It's called "I voted."

774
00:31:51,240 --> 00:31:52,080
You can look it up on the web.

775
00:31:52,080 --> 00:31:52,800
It's kind of a cool thing.

776
00:31:52,800 --> 00:31:54,633
There's a couple of
concerts here in Boston.

777
00:31:54,633 --> 00:31:55,940
They're all over the country.

778
00:31:55,940 --> 00:31:57,690
So you could think
about things like that.

779
00:31:57,690 --> 00:32:00,820
The question is ultimately, do
people Photoshop their picture

780
00:32:00,820 --> 00:32:02,070
in front of the polling place?

781
00:32:02,070 --> 00:32:04,690
It's all just a
question of enforcement.

782
00:32:04,690 --> 00:32:06,540
Let's talk about food banks.

783
00:32:06,540 --> 00:32:08,910
So basically,
these organizations

784
00:32:08,910 --> 00:32:11,310
provide free food to the poor.

785
00:32:11,310 --> 00:32:13,770
And the biggest one is
called "Feeding America."

786
00:32:13,770 --> 00:32:16,500
Feeding America has food
banks all over the nation,

787
00:32:16,500 --> 00:32:20,960
and they provide free
food to the poor.

788
00:32:20,960 --> 00:32:23,000
Now, their goal,
then, is they have

789
00:32:23,000 --> 00:32:26,330
to figure out where to
send the food to get it

790
00:32:26,330 --> 00:32:28,470
to people who need it the most.

791
00:32:28,470 --> 00:32:30,630
Now, a market does
this naturally.

792
00:32:30,630 --> 00:32:32,490
Basically, if people
want more turkey

793
00:32:32,490 --> 00:32:35,340
in location A, then all of a
sudden, the price for turkey

794
00:32:35,340 --> 00:32:35,930
goes up.

795
00:32:35,930 --> 00:32:37,950
All of a sudden, the
store runs out of turkey.

796
00:32:37,950 --> 00:32:39,742
It says, wow, I can
charge more for turkey.

797
00:32:39,742 --> 00:32:42,640
It raises the price, and
it equilibrates the market.

798
00:32:42,640 --> 00:32:45,180
So a market solves for
sending the right food

799
00:32:45,180 --> 00:32:47,500
to where people want it.

800
00:32:47,500 --> 00:32:50,050
But the problem
with Feeding America

801
00:32:50,050 --> 00:32:52,170
is that they didn't
have that market.

802
00:32:52,170 --> 00:32:53,920
So they had to decide
where to send stuff.

803
00:32:53,920 --> 00:32:54,753
And they'd screw up.

804
00:32:54,753 --> 00:32:57,280
They'd send potatoes to
Idaho, where they're drowning

805
00:32:57,280 --> 00:33:00,190
in potatoes, stuff like that.

806
00:33:00,190 --> 00:33:03,027
So it was very hard
for them to figure out

807
00:33:03,027 --> 00:33:05,110
where to send the food
exactly where people wanted

808
00:33:05,110 --> 00:33:07,628
it the most, because they didn't
have the market mechanism.

809
00:33:07,628 --> 00:33:09,170
They wanted to give
it away for free.

810
00:33:09,170 --> 00:33:11,560
That defeats the purpose
if they charge for it.

811
00:33:11,560 --> 00:33:13,180
But they didn't
really know, they

812
00:33:13,180 --> 00:33:15,100
didn't have the
market to tell them

813
00:33:15,100 --> 00:33:16,770
where folks wanted which foods.

814
00:33:16,770 --> 00:33:18,520
In the real market,
if you want real food,

815
00:33:18,520 --> 00:33:19,630
you bit the price up.

816
00:33:19,630 --> 00:33:21,530
In their market, you couldn't.

817
00:33:21,530 --> 00:33:25,150
So Feeding America came up
with a really clever solution.

818
00:33:25,150 --> 00:33:27,960
They made a virtual market.

819
00:33:27,960 --> 00:33:29,970
They said to each
food bank, we are

820
00:33:29,970 --> 00:33:35,280
going to give you a fake
budget of x $100,000,

821
00:33:35,280 --> 00:33:39,120
and you bid for which foods
you want based on what

822
00:33:39,120 --> 00:33:41,010
the people in your area want.

823
00:33:41,010 --> 00:33:44,190
And we'll then allocate it
according to those bids.

824
00:33:44,190 --> 00:33:47,610
So they got the market mechanism
working without the food banks

825
00:33:47,610 --> 00:33:50,500
having to actually
give any money.

826
00:33:50,500 --> 00:33:53,830
So in that way, they
massively reallocated food.

827
00:33:53,830 --> 00:33:55,840
They suddenly said,
hey, the one from Idaho

828
00:33:55,840 --> 00:33:57,840
is bidding really high
for turkey and not at all

829
00:33:57,840 --> 00:33:58,390
for potatoes.

830
00:33:58,390 --> 00:34:00,760
Maybe we should send them
more turkey and the potatoes

831
00:34:00,760 --> 00:34:01,900
elsewhere.

832
00:34:01,900 --> 00:34:03,910
So they essentially
got market signals

833
00:34:03,910 --> 00:34:05,990
from a non-financial
transaction.

834
00:34:05,990 --> 00:34:08,929
It was a super cool idea.

835
00:34:08,929 --> 00:34:10,300
And it was a huge benefit.

836
00:34:10,300 --> 00:34:12,550
They were able to
effectively allocate

837
00:34:12,550 --> 00:34:16,270
about 50 million pounds of
food through this mechanism,

838
00:34:16,270 --> 00:34:19,822
making sure that food got
to the folks that needed it.

839
00:34:19,822 --> 00:34:21,739
So there's an example
how you can use a market

840
00:34:21,739 --> 00:34:25,040
mechanism without actually--
while not violating equity.

841
00:34:25,040 --> 00:34:27,290
The food was always
free, but by setting up

842
00:34:27,290 --> 00:34:29,810
these virtual
prices, they managed

843
00:34:29,810 --> 00:34:31,607
to get the food
delivered to where

844
00:34:31,607 --> 00:34:32,690
people wanted it the most.

845
00:34:32,690 --> 00:34:35,610
They let the market send
its allocative signals.

846
00:34:35,610 --> 00:34:38,052
They let the market be
allocatively efficient,

847
00:34:38,052 --> 00:34:39,510
send signals of
where people wanted

848
00:34:39,510 --> 00:34:43,005
the food, without
actually violating equity.

849
00:34:43,005 --> 00:34:43,880
Questions about that?

850
00:34:46,409 --> 00:34:50,010
Now, let's go to the hardest,
but my favorite example, which

851
00:34:50,010 --> 00:34:53,639
is taxi medallions.

852
00:34:53,639 --> 00:34:56,248
This is a hard example,
but it's a really cool one,

853
00:34:56,248 --> 00:34:57,540
and it ends with a great story.

854
00:35:01,720 --> 00:35:05,360
Taxicabs-- now, cast
your mind back pre Uber.

855
00:35:05,360 --> 00:35:07,850
Go back 10 years, or even--

856
00:35:07,850 --> 00:35:10,170
yeah, about 10 years.

857
00:35:10,170 --> 00:35:12,840
Taxicabs were the only way
you could get around town

858
00:35:12,840 --> 00:35:13,710
if you didn't have--

859
00:35:13,710 --> 00:35:15,960
if you wanted to get from
point A to point B in a car,

860
00:35:15,960 --> 00:35:19,110
you didn't own one,
you took a taxi.

861
00:35:19,110 --> 00:35:22,290
And this was a great example
of an economist's perfectly

862
00:35:22,290 --> 00:35:23,903
competitive market, in theory.

863
00:35:23,903 --> 00:35:26,070
It's identical product--
you want to go from point A

864
00:35:26,070 --> 00:35:28,620
to point B.

865
00:35:28,620 --> 00:35:30,870
There could be lots of them
riding around the streets.

866
00:35:30,870 --> 00:35:32,328
You can price
compare, because cabs

867
00:35:32,328 --> 00:35:34,413
are coming by all the time.

868
00:35:34,413 --> 00:35:36,830
It should have been a very
effective, perfectly efficient,

869
00:35:36,830 --> 00:35:39,140
perfectly competitive market.

870
00:35:39,140 --> 00:35:41,750
But it wasn't,
because every city

871
00:35:41,750 --> 00:35:43,640
limited the amount
of taxicabs that

872
00:35:43,640 --> 00:35:45,830
were allowed in their city.

873
00:35:45,830 --> 00:35:49,860
Every city had a system
where to be a taxicab,

874
00:35:49,860 --> 00:35:52,962
you had to have what was
called a "medallion."

875
00:35:52,962 --> 00:35:54,170
It wasn't really a medallion.

876
00:35:54,170 --> 00:35:55,420
It was originally a medallion.

877
00:35:55,420 --> 00:35:57,210
It's just a piece
of paper, actually.

878
00:35:57,210 --> 00:36:01,350
And they regulated the number
of taxicabs allowed in the city.

879
00:36:01,350 --> 00:36:03,847
They said, we're only
going allow x many taxicab

880
00:36:03,847 --> 00:36:04,680
drivers in the city.

881
00:36:04,680 --> 00:36:06,870
And every city did this.

882
00:36:06,870 --> 00:36:10,570
Now, we're going to do both a
positive and normative analysis

883
00:36:10,570 --> 00:36:12,030
of this policy.

884
00:36:12,030 --> 00:36:14,130
Let's start with a
positive analysis.

885
00:36:14,130 --> 00:36:16,812
What did this policy do?

886
00:36:16,812 --> 00:36:18,270
Now I'm going to
go to figure 10-4.

887
00:36:18,270 --> 00:36:21,180
Figure 10-4 will be one of
the most complicated figures

888
00:36:21,180 --> 00:36:22,020
we do in this class.

889
00:36:22,020 --> 00:36:23,937
I'm going to go through
it as slowly as I can,

890
00:36:23,937 --> 00:36:26,393
but please stop me
if it's not clear.

891
00:36:26,393 --> 00:36:28,560
This is one of these figures
we'll go back and forth

892
00:36:28,560 --> 00:36:30,370
between the two sides.

893
00:36:30,370 --> 00:36:32,190
So on the right-hand
side is the market.

894
00:36:32,190 --> 00:36:34,110
On the left-hand
side is the cab firm.

895
00:36:34,110 --> 00:36:37,875
We're going to start by
assuming all cabs are identical.

896
00:36:37,875 --> 00:36:39,250
We assume all cabs
are identical,

897
00:36:39,250 --> 00:36:44,700
so one representative firm
tells us about every cab firm.

898
00:36:44,700 --> 00:36:46,200
Now, we start with the market.

899
00:36:46,200 --> 00:36:48,570
We have an initial
demand, which is d.

900
00:36:48,570 --> 00:36:53,135
The line d, the blue line,
is the demand for taxicabs.

901
00:36:53,135 --> 00:36:56,280
An initial supply
curve s1, we're

902
00:36:56,280 --> 00:36:58,150
going to assume
that essentially,

903
00:36:58,150 --> 00:36:59,850
in a perfectly
competitive market,

904
00:36:59,850 --> 00:37:02,070
you have a flat, long
run supply curve.

905
00:37:02,070 --> 00:37:04,990
You have perfectly
elastic supply.

906
00:37:04,990 --> 00:37:06,910
Anybody can just grab a
cab and start driving.

907
00:37:06,910 --> 00:37:09,220
Once again, in a cab
market without medallions,

908
00:37:09,220 --> 00:37:11,640
anyone could throw a
taxi sign on the car

909
00:37:11,640 --> 00:37:14,110
and start driving around,
picking people up.

910
00:37:14,110 --> 00:37:17,032
So it's effectively
perfectly entry and exit,

911
00:37:17,032 --> 00:37:19,490
so it's a perfectly competitive
long run market, therefore,

912
00:37:19,490 --> 00:37:21,520
flat supply at s1.

913
00:37:21,520 --> 00:37:27,120
So the initial equilibrium
is at point big E1.

914
00:37:27,120 --> 00:37:31,380
We have Q1 rides, big
Q1 rides per month.

915
00:37:31,380 --> 00:37:33,910
And that amounts to--

916
00:37:33,910 --> 00:37:34,680
so you have q.

917
00:37:34,680 --> 00:37:35,710
That's the equilibrium.

918
00:37:35,710 --> 00:37:37,032
Now, how many firms are there?

919
00:37:37,032 --> 00:37:38,490
Well, we know many
firms there are,

920
00:37:38,490 --> 00:37:42,470
because we say at that
price, p1, we go to the left.

921
00:37:42,470 --> 00:37:45,770
We know that firms will produce
where marginal cost equals

922
00:37:45,770 --> 00:37:49,160
the average cost at the minimum
of long run average cost.

923
00:37:49,160 --> 00:37:51,050
We proved that a
couple lectures ago.

924
00:37:51,050 --> 00:37:53,300
Therefore, if the
price is E1, we

925
00:37:53,300 --> 00:37:57,950
know each efficient firm
will produce little q1.

926
00:37:57,950 --> 00:38:00,440
If each firm's going
to produce little q1,

927
00:38:00,440 --> 00:38:03,020
and the total amount of
rides is going to be big Q1,

928
00:38:03,020 --> 00:38:06,210
then that implies
little n1 firms.

929
00:38:06,210 --> 00:38:07,580
So let me go through it again.

930
00:38:07,580 --> 00:38:10,870
Supply equals demand at big Q1.

931
00:38:10,870 --> 00:38:13,330
That gives you a price P1.

932
00:38:13,330 --> 00:38:15,040
Now we shift to the left.

933
00:38:15,040 --> 00:38:18,490
At that price P1, we
know that each firm

934
00:38:18,490 --> 00:38:20,680
will choose to produce
little q1 rides,

935
00:38:20,680 --> 00:38:22,930
because that's where price
equals marginal cost equals

936
00:38:22,930 --> 00:38:24,530
average cost.

937
00:38:24,530 --> 00:38:26,170
Now we go back to the right.

938
00:38:26,170 --> 00:38:29,090
We know if each firm is
providing little q1 rides,

939
00:38:29,090 --> 00:38:33,790
and you need big Q1, then
there must be N1 firms.

940
00:38:33,790 --> 00:38:36,460
Questions about that?

941
00:38:36,460 --> 00:38:39,836
That's the initial equilibrium.

942
00:38:39,836 --> 00:38:45,220
And at that point, there
are long run zero profits.

943
00:38:45,220 --> 00:38:49,240
Consumer surplus
is a plus b plus c.

944
00:38:49,240 --> 00:38:52,060
c, by the way, is the
gray area on either side

945
00:38:52,060 --> 00:38:53,720
of the dashed line.

946
00:38:53,720 --> 00:38:56,230
a plus b plus c, we mark it
twice because it's confusing,

947
00:38:56,230 --> 00:38:57,620
the dashed line there.

948
00:38:57,620 --> 00:39:00,080
So the blue area, the green
area, and the gray area

949
00:39:00,080 --> 00:39:01,350
are the consumer surplus.

950
00:39:01,350 --> 00:39:03,853
And what's the producer surplus?

951
00:39:03,853 --> 00:39:05,020
What's the producer surplus?

952
00:39:05,020 --> 00:39:06,450
Raise your hand and tell me.

953
00:39:06,450 --> 00:39:06,950
Yeah.

954
00:39:06,950 --> 00:39:07,750
AUDIENCE: [INAUDIBLE]

955
00:39:07,750 --> 00:39:09,000
JONATHAN GRUBER: Zero because?

956
00:39:09,000 --> 00:39:10,130
AUDIENCE: [INAUDIBLE]

957
00:39:10,130 --> 00:39:12,630
JONATHAN GRUBER: Yeah, there's
no-- in long run equilibrium,

958
00:39:12,630 --> 00:39:13,460
there's no profits.

959
00:39:13,460 --> 00:39:16,160
In long run equilibrium, price--

960
00:39:16,160 --> 00:39:18,330
remember, profits are
price minus average cost,

961
00:39:18,330 --> 00:39:21,180
but price equals average cost.

962
00:39:21,180 --> 00:39:23,490
So there's no profit, so
it's all consumer surplus--

963
00:39:23,490 --> 00:39:24,742
all well and good.

964
00:39:24,742 --> 00:39:26,700
Now let's say the government
comes in and says,

965
00:39:26,700 --> 00:39:28,325
we're going to have
a medallion system.

966
00:39:33,380 --> 00:39:40,280
So let's say we're going to
have a system where only little

967
00:39:40,280 --> 00:39:43,100
n2 cabs are allowed
in the market.

968
00:39:43,100 --> 00:39:47,720
Little n2 are the only number
of cabs allowed in the market.

969
00:39:47,720 --> 00:39:49,610
So what is the new
market supply curve?

970
00:39:49,610 --> 00:39:50,562
Start on the right.

971
00:39:50,562 --> 00:39:52,020
What's the new
market supply curve?

972
00:39:52,020 --> 00:39:57,620
Well, up to little n2 times
q1, nothing's changed.

973
00:39:57,620 --> 00:40:03,310
Each cab company used to provide
little q1 rides at a price P1.

974
00:40:03,310 --> 00:40:05,610
So up to the point
little n2 little q1,

975
00:40:05,610 --> 00:40:08,180
we're on the same supply
curve we used to be on.

976
00:40:08,180 --> 00:40:09,380
But then things change.

977
00:40:09,380 --> 00:40:10,730
Why do they change?

978
00:40:10,730 --> 00:40:14,570
Because now, let's say riders
want more than little n2 q1.

979
00:40:14,570 --> 00:40:16,820
Well, you can't deal
with that by entry.

980
00:40:16,820 --> 00:40:19,080
You have to deal with
that by the existing cab

981
00:40:19,080 --> 00:40:21,320
drivers working more.

982
00:40:21,320 --> 00:40:23,420
But if they work
more, supply curve

983
00:40:23,420 --> 00:40:27,262
is upward sloping, because now
marginal costs can be rising.

984
00:40:27,262 --> 00:40:28,720
Before, the reason
the supply curve

985
00:40:28,720 --> 00:40:33,070
was flat when you went to the
right of little n2 little q1,

986
00:40:33,070 --> 00:40:35,440
as you moved to the right,
you just got more entry.

987
00:40:35,440 --> 00:40:37,482
And everyone still produces
their efficient level

988
00:40:37,482 --> 00:40:38,240
of little q1.

989
00:40:38,240 --> 00:40:40,840
Now, when you can't
allow more entry,

990
00:40:40,840 --> 00:40:42,760
firms have to produce more.

991
00:40:42,760 --> 00:40:45,940
And suddenly, they're not at
the cost minimizing point.

992
00:40:45,940 --> 00:40:49,070
They're riding up their
marginal cost curve.

993
00:40:49,070 --> 00:40:51,280
So the supply curve
becomes flat to that point,

994
00:40:51,280 --> 00:40:53,050
and then becomes upward sloping.

995
00:40:53,050 --> 00:40:55,170
And that's s2.

996
00:40:55,170 --> 00:40:58,380
s2 is the red line that
is flat to the left

997
00:40:58,380 --> 00:41:03,730
of little n2 little q1, and
then becomes upward sloping.

998
00:41:03,730 --> 00:41:08,110
And the new equilibrium
is at point E2.

999
00:41:08,110 --> 00:41:11,590
With n2 firms-- by law, you
can only have n2 firms--

1000
00:41:11,590 --> 00:41:16,360
producing little q2 rides each.

1001
00:41:16,360 --> 00:41:18,940
And your new
equilibrium is big Q2.

1002
00:41:18,940 --> 00:41:26,920
And that new
equilibrium price is P2.

1003
00:41:26,920 --> 00:41:29,860
The new equilibrium price is P2.

1004
00:41:29,860 --> 00:41:34,990
Now P2, if you go to the old--

1005
00:41:34,990 --> 00:41:39,490
P2 is the point, if you
look at the price as P2,

1006
00:41:39,490 --> 00:41:40,780
but forget the a c2 curve.

1007
00:41:40,780 --> 00:41:43,932
Focus on the a c1 curve.

1008
00:41:43,932 --> 00:41:45,640
The average cost
function hasn't changed.

1009
00:41:45,640 --> 00:41:46,960
It's still a c1.

1010
00:41:46,960 --> 00:41:52,158
So if the price is P2 and the
average cost curve is a c1,

1011
00:41:52,158 --> 00:41:53,950
they're going to produce
where price equals

1012
00:41:53,950 --> 00:41:56,500
marginal cost at little e2.

1013
00:41:56,500 --> 00:41:58,900
So let me back up.

1014
00:41:58,900 --> 00:42:01,150
Let's go back to the
curve on the right.

1015
00:42:01,150 --> 00:42:03,260
The equilibrium is now big E2.

1016
00:42:03,260 --> 00:42:04,840
That's at a price little p2.

1017
00:42:04,840 --> 00:42:06,550
Now shift to the left.

1018
00:42:06,550 --> 00:42:09,700
At a price of little
p2, firms produce where

1019
00:42:09,700 --> 00:42:12,220
price equals marginal cost.

1020
00:42:12,220 --> 00:42:15,860
Price equals marginal cost
at a quantity little q2.

1021
00:42:15,860 --> 00:42:17,720
So firms produce little
q2, because that's

1022
00:42:17,720 --> 00:42:20,030
the point at which price
equals marginal cost.

1023
00:42:20,030 --> 00:42:23,510
They produce at little q2, if
they're making little q2 units

1024
00:42:23,510 --> 00:42:29,330
at a price p2, their earning
profits of pi, the shaded area,

1025
00:42:29,330 --> 00:42:33,880
because they are producing units
at price above marginal cost.

1026
00:42:33,880 --> 00:42:36,290
And they're producing
little q2 units,

1027
00:42:36,290 --> 00:42:38,790
so every unit they produce,
they're earning profits on.

1028
00:42:38,790 --> 00:42:42,890
So the taxi medallion
workers or the taxi companies

1029
00:42:42,890 --> 00:42:44,360
are now making money.

1030
00:42:44,360 --> 00:42:46,780
They're making profits.

1031
00:42:46,780 --> 00:42:48,504
Questions about that?

1032
00:42:48,504 --> 00:42:49,468
Yeah.

1033
00:42:49,468 --> 00:42:52,133
AUDIENCE: [INAUDIBLE] the
idea that if you allowed

1034
00:42:52,133 --> 00:42:54,300
for people, more people to
go then, profits would be

1035
00:42:54,300 --> 00:42:54,920
[INAUDIBLE]?

1036
00:42:54,920 --> 00:42:56,460
JONATHAN GRUBER: Yeah, but
they're not allowing them in.

1037
00:42:56,460 --> 00:42:57,540
They're making profits.

1038
00:42:57,540 --> 00:43:01,890
So imagine where we started
at E2 and allowed free entry.

1039
00:43:01,890 --> 00:43:04,950
Then you'd see, basically,
more firms willing to drive

1040
00:43:04,950 --> 00:43:05,910
the price down to P1.

1041
00:43:05,910 --> 00:43:08,550
But we don't allow
that, so it's profits.

1042
00:43:08,550 --> 00:43:11,280
It's a barrier to
entry, which creates

1043
00:43:11,280 --> 00:43:14,543
profits, which breaks us from
our long run flat supply curve.

1044
00:43:14,543 --> 00:43:15,960
We talked about
one of the reasons

1045
00:43:15,960 --> 00:43:18,240
why that loop won't be flat.

1046
00:43:18,240 --> 00:43:20,740
So now, let's move
to the normative.

1047
00:43:20,740 --> 00:43:22,375
Is this a good idea or not?

1048
00:43:22,375 --> 00:43:24,250
Well, let's look at the
welfare implications.

1049
00:43:24,250 --> 00:43:26,130
What's happened?

1050
00:43:26,130 --> 00:43:29,220
What's happened
is consumers used

1051
00:43:29,220 --> 00:43:32,370
to have a surplus
of a plus b plus c.

1052
00:43:32,370 --> 00:43:34,497
Now, their surplus is what?

1053
00:43:34,497 --> 00:43:35,830
What's the new consumer surplus?

1054
00:43:35,830 --> 00:43:36,790
Raise their hand and tell me.

1055
00:43:36,790 --> 00:43:36,940
Yeah.

1056
00:43:36,940 --> 00:43:37,770
AUDIENCE: A.

1057
00:43:37,770 --> 00:43:40,420
JONATHAN GRUBER: Just a, because
the line below the demand

1058
00:43:40,420 --> 00:43:42,480
above price is just a.

1059
00:43:42,480 --> 00:43:44,190
Producers used to
have zero surplus.

1060
00:43:44,190 --> 00:43:46,580
What's their new surplus?

1061
00:43:46,580 --> 00:43:47,310
Behind you, yeah.

1062
00:43:47,310 --> 00:43:47,810
AUDIENCE: B.

1063
00:43:47,810 --> 00:43:50,227
JONATHAN GRUBER: B, because
it's the area above the supply

1064
00:43:50,227 --> 00:43:51,830
curve, below the price line.

1065
00:43:51,830 --> 00:43:54,360
And c is what?

1066
00:43:54,360 --> 00:43:55,920
The deadweight loss.

1067
00:43:55,920 --> 00:44:00,080
Those are transactions
no longer happening--

1068
00:44:00,080 --> 00:44:02,960
the deadweight loss.

1069
00:44:02,960 --> 00:44:06,350
So basically, normatively,
you can pose the problem

1070
00:44:06,350 --> 00:44:07,940
as the following--

1071
00:44:07,940 --> 00:44:12,470
is it worth society
losing the area c

1072
00:44:12,470 --> 00:44:16,580
in order to transfer the
area b from consumers

1073
00:44:16,580 --> 00:44:18,728
to taxicab drivers?

1074
00:44:18,728 --> 00:44:20,520
That's the way to think
about this problem.

1075
00:44:20,520 --> 00:44:21,000
Let me say it again.

1076
00:44:21,000 --> 00:44:22,000
It's very important.

1077
00:44:22,000 --> 00:44:24,417
Essentially what the government
policy is doing is saying,

1078
00:44:24,417 --> 00:44:27,570
I'm going to transfer
b from consumers

1079
00:44:27,570 --> 00:44:29,970
to producers, even though
it's going to cost me

1080
00:44:29,970 --> 00:44:32,860
c in deadweight loss.

1081
00:44:32,860 --> 00:44:34,360
That's what the
government's saying.

1082
00:44:34,360 --> 00:44:35,800
That's the
government's position.

1083
00:44:38,550 --> 00:44:42,280
Now, why is the
government wrong?

1084
00:44:42,280 --> 00:44:44,590
Why, in fact, is that
not the proper statement

1085
00:44:44,590 --> 00:44:45,860
of what happens?

1086
00:44:45,860 --> 00:44:48,100
It's very complicated.

1087
00:44:48,100 --> 00:44:51,470
What does the government
miss when it says,

1088
00:44:51,470 --> 00:44:52,940
I've made the
drivers better off?

1089
00:44:52,940 --> 00:44:53,870
Sure, I've created
deadweight loss,

1090
00:44:53,870 --> 00:44:54,920
and I make consumers
[INAUDIBLE],,

1091
00:44:54,920 --> 00:44:56,510
but at least I made
these drivers better off.

1092
00:44:56,510 --> 00:44:57,410
They live terrible lives.

1093
00:44:57,410 --> 00:44:59,180
There's articles in the paper
all the time about suicides

1094
00:44:59,180 --> 00:45:00,410
of taxicab drivers.

1095
00:45:00,410 --> 00:45:01,040
It's terrible.

1096
00:45:01,040 --> 00:45:01,640
What did they miss?

1097
00:45:01,640 --> 00:45:02,140
Yeah.

1098
00:45:02,140 --> 00:45:03,975
AUDIENCE: The cost
of taxis goes up.

1099
00:45:03,975 --> 00:45:06,350
JONATHAN GRUBER: They've missed
the fact that the taxicab

1100
00:45:06,350 --> 00:45:09,308
drivers have to
buy the medallions,

1101
00:45:09,308 --> 00:45:10,850
that the limited
number of medallions

1102
00:45:10,850 --> 00:45:14,680
aren't just given to taxicab
drivers, they're bought.

1103
00:45:14,680 --> 00:45:16,630
And the taxicab drivers--

1104
00:45:16,630 --> 00:45:21,410
what is a taxicab driver
willing to pay for a medallion?

1105
00:45:21,410 --> 00:45:24,830
They are willing to pay, in
the limit, the total surplus

1106
00:45:24,830 --> 00:45:29,040
they get from driving the cab
minus $1 or minus some amount

1107
00:45:29,040 --> 00:45:30,860
that they need to eat.

1108
00:45:30,860 --> 00:45:34,650
So if suddenly, in a world
with no restrictions,

1109
00:45:34,650 --> 00:45:36,540
with no taxicab
medallions, if you said

1110
00:45:36,540 --> 00:45:38,540
we need a piece of
paper to drive a taxi,

1111
00:45:38,540 --> 00:45:41,810
but anyone can have it for
free, what would it be worth?

1112
00:45:41,810 --> 00:45:43,340
Zero.

1113
00:45:43,340 --> 00:45:46,300
But in a world where you say
if you have this piece of paper

1114
00:45:46,300 --> 00:45:50,210
you can drive, and
drivers earn profits pi,

1115
00:45:50,210 --> 00:45:54,130
what will the taxicab
medallions sell for?

1116
00:45:54,130 --> 00:45:56,810
Pi minus some small amount.

1117
00:45:56,810 --> 00:45:59,640
So actually, who wins?

1118
00:45:59,640 --> 00:46:01,980
The taxicab medallion owners.

1119
00:46:01,980 --> 00:46:03,780
And who are they?

1120
00:46:03,780 --> 00:46:05,910
They are random
folks who happened

1121
00:46:05,910 --> 00:46:09,000
to get these things in
1920 when they were issued,

1122
00:46:09,000 --> 00:46:12,180
and their descendants, and
people who bought them.

1123
00:46:12,180 --> 00:46:15,660
So this leads to my great story,
the taxicab medallion king

1124
00:46:15,660 --> 00:46:17,587
of Long Island was
a guy who happened

1125
00:46:17,587 --> 00:46:19,420
to have a bunch of these
taxicab medallions.

1126
00:46:19,420 --> 00:46:21,753
And as they went through the
roof, they got worth a lot.

1127
00:46:21,753 --> 00:46:27,810
In New York, New York
had 12,000 permits,

1128
00:46:27,810 --> 00:46:30,840
and that number did not
change since they originally

1129
00:46:30,840 --> 00:46:33,475
sold for $10 each in 1937.

1130
00:46:33,475 --> 00:46:35,475
1937, you could have
bought [INAUDIBLE] for $10,

1131
00:46:35,475 --> 00:46:37,770
and they issued 12,000 of them.

1132
00:46:37,770 --> 00:46:39,750
They've never increased it.

1133
00:46:39,750 --> 00:46:45,208
Right now, a taxicab medallion
in New York is worth $400,000.

1134
00:46:45,208 --> 00:46:46,750
The taxicab King of
New York is a guy

1135
00:46:46,750 --> 00:46:50,760
who lives in Long Island who
made so much money that he

1136
00:46:50,760 --> 00:46:53,810
actually, for his
kid's bar mitzvah

1137
00:46:53,810 --> 00:46:56,310
not only had rented out a hotel,
whole basketball-themed bar

1138
00:46:56,310 --> 00:47:00,080
mitzvah, but hired Nicki Minaj.

1139
00:47:00,080 --> 00:47:04,460
This was paid for by area b.

1140
00:47:04,460 --> 00:47:06,290
This was paid for--
so in fact, it's

1141
00:47:06,290 --> 00:47:09,560
not the taxicab drivers that
make out of this policy.

1142
00:47:09,560 --> 00:47:13,950
It's the taxicab medallion
King of New York.

1143
00:47:13,950 --> 00:47:16,185
Now, here's what happens--

1144
00:47:18,740 --> 00:47:21,080
what happens, then,
when Uber comes in?

1145
00:47:21,080 --> 00:47:23,950
Who's the big loser?

1146
00:47:23,950 --> 00:47:27,432
Not the taxicab drivers, the
taxicab medallion owners.

1147
00:47:27,432 --> 00:47:29,140
So everyone tells you
Uber is a bad thing

1148
00:47:29,140 --> 00:47:31,210
because these poor taxicab
drivers are starving.

1149
00:47:31,210 --> 00:47:33,820
Taxicab drivers were
always starving.

1150
00:47:33,820 --> 00:47:35,290
It was always a terrible life.

1151
00:47:35,290 --> 00:47:40,560
The difference is pricing
medallions is down like 50%.

1152
00:47:40,560 --> 00:47:45,647
And I cry no tears for the Nicki
Minaj-hiring class of America.

1153
00:47:45,647 --> 00:47:47,980
So basically, when you think
about people saying Uber is

1154
00:47:47,980 --> 00:47:51,340
bad, it steals jobs from
taxicab drivers, no, it doesn't.

1155
00:47:51,340 --> 00:47:53,950
It steals money from
taxicab medallion owners,

1156
00:47:53,950 --> 00:47:56,380
and that is something
we might be OK with.

1157
00:47:56,380 --> 00:47:59,050
So feel fine taking your Uber.

1158
00:47:59,050 --> 00:48:00,740
It's a great thing.

1159
00:48:00,740 --> 00:48:02,830
So let me stop there.

1160
00:48:02,830 --> 00:48:04,750
I'm going to come back.

1161
00:48:04,750 --> 00:48:06,470
We'll come back next lecture.

1162
00:48:06,470 --> 00:48:10,670
And we will start talking about
monopoly, the market structure,

1163
00:48:10,670 --> 00:48:12,360
not the game.