Price Ceilings: Misallocation of Resources
Suppose there is a mild winter on the West Coast and a harsh winter on the East Coast. As a result of the weather, people on the East Coast will demand more home
Suppose there is a mild winter on the West Coast and a harsh winter on the East Coast. As a result of the weather, people on the East Coast will demand more home heating oil, bidding up the price. Under the price system, entrepreneurs will be incentivized to take oil from where it has lower value on West Coast to where it has higher value on the East Coast. But when price controls are in place, even though the demand is still there from the East Coast, there is no signal of a higher price, eliminating the incentive for entrepreneurs to transport oil from west to east. In fact, this happened in the 1970s, resulting in oil going to lower valued uses on the West Coast while many people on the East Coast didn’t have enough oil to heat their homes. In this video, we’ll look at a diagram to visualize this misallocation of resources.
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I think that while misallocation of resources as described in the video is a very important (and often unduly omitted) point, it applies precisely to situations when goods are allocated to buyers in a totally random fashion, where there is no competition among buyers on other (non-price) margins - lines, bribes etc. On the other hand, if buyers engage in any activity to outcompete other buyers and secure allocation of goods to themselves, these very activities ensure that ultimately the goods will indeed end up in the hands of those buyers who value the goods most as they were willing to sacrifice the most. (These successful buyers will not be always the same group of people as their composition will be affected by the structure of the ultimate cost these buyers incur in getting the goods.) There would then be, strictly speaking, no misallocation of resources as described in the video. Would it be fair to say then, that unlike the DWL, the misallocation of resources is a consequence of price controls that is possible, but not necessary?