WELL, LET'S GET STARTED. WHAT WE WANT TO DO TODAY IS REALLY FINISH UP TALKING ABOUT SUPPLY AND DEMAND. I'VE GOT A FEW MORE

Transcription

1 ECO LECTURE ELEVEN 1 WELL, LET'S GET STARTED. WHAT WE WANT TO DO TODAY IS REALLY FINISH UP TALKING ABOUT SUPPLY AND DEMAND. I'VE GOT A FEW MORE APPLICATIONS FOR YOU. BUT AFTER TODAY, THEN WE'LL GO ON TO THE NEXT TOPIC WHICH WILL BE REALLY MACROECONOMICS. THIS STUFF THAT WE'VE BEEN TALKING ABOUT, WITH THE SUPPLY AND DEMAND AND SO FORTH, HAS BEEN MICROECONOMICS. WE'RE TRYING TO UNDERSTAND INDIVIDUAL MARKETS AND INDIVIDUAL BEHAVIOR MORE THAN THE OVERALL ECONOMY. AND SO WE'LL TURN TO MACROECONOMIC SUBJECTS NEXT TIME. ANYWAY, SO IF YOU'LL REMEMBER WHERE I ENDED UP LAST TIME, LET ME JUST SORT OF PUT THAT UP HERE AGAIN BECAUSE WE WANT TO COME BACK TO IT LATER. BECAUSE WE TALKED ABOUT A PRICE CEILING. AND WITH THE PRICE CEILING, WHAT WE HAVE IS A LEGAL MAXIMUM PRICE AND THAT LEGAL MAXIMUM IS BELOW THE EQUILIBRIUM PRICE OR THE MARKET CLEARING PRICE. PE IS THE EQUILIBRIUM OR MARKET CLEARING, AND WE'VE GOT A PRICE THAT'S BELOW THAT. OKAY. A MAXIMUM PRICE. WE WILL NOT LET THE PRICE GO ABOVE THE CEILING. OKAY. SO ANYWAY, I THINK THAT'S WHAT WE TALKED ABOUT LAST TIME AT THE END OF THE HOUR, ISN'T IT? PARDON ME? [STUDENT SPEAKING INAUDIBLE] THERE IS A PRICE CEILING. HERE'S A PRICE FLOOR. AND WHAT EXAMPLE DID I GIVE OF THIS? I THINK I GAVE A FEW EXAMPLES. I THINK RENT CONTROLS WOULD BE ONE EXAMPLE OF A PRICE CEILING. HERE'S A PRICE FLOOR, SUPPLY AND DEMAND. A PRICE FLOOR IS A

2 ECO LECTURE ELEVEN 2 MINIMUM PRICE AND THAT MINIMUM PRICE IS ABOVE THE EQUILIBRIUM PRICE. WHAT WE HAD WITH THE PRICE CEILING IS QUANTITY DEMANDED IS LARGE, QUANTITY SUPPLIED IS SMALL, QD QS, AND WHAT WE HAVE IS A SHORTAGE. WITH THE PRICE FLOOR ABOVE THE EQUILIBRIUM PRICE, THEN THE HIGH PRICE ABOVE EQUILIBRIUM, IT ENCOURAGES A LARGE LEVEL OF PRODUCTION, QUANTITY SUPPLIED IS LARGE. BUT THE HIGH PRICE DISCOURAGES CONSUMERS, QUANTITY DEMANDED IS SMALL, SO WE HAVE IT AS A SURPLUS. SO WE HAD A SHORTAGE PREVIOUSLY WITH A PRICE CEILING; WE HAVE A SURPLUS NOW WITH A PRICE FLOOR. I GAVE AN EXAMPLE HERE OF RENT CONTROLS WHEN I WAS TALKING ABOUT A PRICE CEILING. AN EXAMPLE HERE MIGHT BE THE MINIMUM WAGE. WITH THE MINIMUM WAGE, WHAT WE'D BE TALKING ABOUT -- RATHER THAN JUST SAY X, WE'D BE TALKING ABOUT LABOR. THERE'S A DEMAND CURVE FOR LABOR; THERE'S A SUPPLY CURVE FOR LABOR. AND RATHER THAN JUST TALKING ABOUT PRICE UP HERE, WE'D BE TALKING ABOUT THE WAGE RATE. BUT IF YOU PUT LABOR ON THE HORIZONTAL AXIS AND WAGE ON THE VERTICAL SUPPLY AND DEMAND -- THIS IS SUPPLY AND DEMAND FOR LABOR - - AND THEN HERE'S THE MINIMUM WAGE. AND NORMALLY, THAT MINIMUM WAGE WOULD BE SET ABOVE THE MARKET CLEARING OR THE EQUILIBRIUM PRICE. AND THEN WHAT WE WOULD OBSERVE WOULD BE A CERTAIN AMOUNT OF SURPLUS LABOR. WHAT DO WE MEAN BY SURPLUS LABOR? WE MEAN UNEMPLOYMENT. AND SO WHAT I'M TELLING YOU IS -- AND, BY THE WAY, THE MINIMUM

3 ECO LECTURE ELEVEN 3 WAGE DOESN'T CREATE UNEMPLOYMENT AMONG PEOPLE WITH PHD'S. I'M NOT WORRIED ABOUT BEING THROWN OUT OF WORK. BUT WHAT I'M SAYING IS THAT I KNOW WHEN I WAS A YOUNG MAN THAT I WENT OUT LOOKING FOR JOBS, AND I'D ASK AND ASK AND ASK, AND, YOU KNOW, THEY HAD TO HIRE ME AT THE MINIMUM WAGE OR NOT HIRE ME. AND SO VERY OFTEN -- VERY OFTEN, EXTREMELY OFTEN, ALMOST ALL THE TIME -- THEY WOULD JUST DECIDE, "DON'T HIRE THIS GUY." OKAY. WHY IS THAT? WELL, IF THE WAGE COULD JUST GO DOWN TO ANY LEVEL, THEN WHAT MIGHT'VE HAPPENED IS I'D SHOW UP, I MAKE APPLICATION, I'D LIKE TO HAVE A JOB HERE, AND THEN THEY COULD SAY, "WELL, THE MINIMUM WAGE IS WHATEVER" -- WELL, THERE WOULDN'T BE A MINIMUM WAGE. BUT IF I SHOWED UP LOOKING FOR A JOB AND I SAY I'M ASKING FOR, YOU KNOW, TEN DOLLARS AN HOUR, THEY COULD SAY NO. AND I COULD SAY, "NINE. EIGHT. SEVEN. SIX. FIVE," AND, I MEAN, GET 'EM DOWN TO A PRICE AND FINALLY THEY'D SAY, "YEAH. FOR THAT PRICE, YOU CAN GO OUT AND WASH MY CAR. AND BE SURE AND GET THOSE HUBCAPS CLEAN. AND THEN, YOU KNOW, COME ON BACK IN AND POLISH MY SHOES." THERE IS SOME PRICE WHERE I COULD GET A JOB -- ASSUMING I WASN'T GONNA COME IN, YOU KNOW, WITH A PISTOL AND START SHOOTING THE PLACE UP OR SOMETHING. BUT THERE IS SOME PRICE WHERE THEY WOULD'VE BEEN WILLING TO HIRE ME. BUT WITH THE MINIMUM WAGE, WHAT THEY SAY IS, "I CAN'T GO BELOW THAT PRICE. I EITHER HAVE TO PAY YOU THIS MUCH OR I CAN'T HIRE YOU."

4 ECO LECTURE ELEVEN 4 SO ANYWAY, MINIMUM WAGE IS AN EXAMPLE OF A PRICE FOR AND THAT PRICE FOR CREATES UNEMPLOYMENT. WHO'S IT CREATE UNEMPLOYMENT FOR? IT CREATES UNEMPLOYMENT FOR PEOPLE WITH LOW SKILLS, ALL RIGHT? PEOPLE WITH HIGH SKILLS DON'T -- THEY WORK WELL ABOVE THE MINIMUM WAGE, SO IT'S THE LOW SKILLED PEOPLE. AND WE'RE NOW TALKING ABOUT PEOPLE THAT ARE YOUNG PEOPLE, SIXTEEN-, SEVENTEEN-, EIGHTEEN-YEAR-OLDS USUALLY. THEY'LL BE WORKING FOR THE MINIMUM WAGE. OTHER PEOPLE THAT WORK FOR MINIMUM WAGE, THEN, MAY BE OLDER BUT HAVE VERY LOW SKILLS. AND SO PEOPLE WITH LOW SKILLS, WHETHER THEY'RE YOUNGER OR OLDER -- BUT A LOT OF THEM ARE YOUNG -- PEOPLE WITH LOW SKILLS ARE THE ONES THAT ARE AFFECTED BY THE MINIMUM WAGE. AND THOSE LOW-SKILLED PEOPLE -- MAYBE MORE OF THEM WOULD GET A JOB -- HOW MANY PEOPLE GET A JOB IN THIS CASE? THE QUANTITY DEMANDED IS RIGHT HERE. EMPLOYERS WANT TO HIRE THAT MANY. THAT'S HOW MANY JOBS THERE ARE. IF WE DID NOT HAVE THE MINIMUM WAGE, THE NUMBER OF JOBS WOULD BE THIS MANY, THE EQUILIBRIUM QUANTITY OF JOBS IN THE MARKETPLACE. SO THERE ARE FEW PEOPLE -- FEWER PEOPLE FINDING WORK WITH THE MINIMUM WAGE. DOES THAT MEAN THAT'S BAD? THIS IS NOT NORMATIVE ECONOMICS. I'M NOT TAKING SIDES. I'M NOT SAYING, "IS IT GOOD OR IS IT BAD?" DON'T KNOW. EACH PERSON GETS TO MAKE THEIR OWN DECISION ON THAT. WHAT I'M SAYING IS, HERE'S THE EFFECT OF IT. IF WE HAVE A MINIMUM WAGE, IT

5 ECO LECTURE ELEVEN 5 WILL CREATE A SITUATION WHERE THERE'S SOME UNEMPLOYMENT AND THAT MAY OR MAY NOT BE BAD. IT FEELS BAD FOR THE PEOPLE WHO CAN'T FIND JOBS. AS I SAY, I REMEMBER LOOKING FOR JOBS WHEN I WAS A YOUNG MAN AND I JUST KEPT GETTING TURNED DOWN. AND IT SORT OF MADE ME THINK, "GOSH, AM I WORTH NOTHING?" VERY NEAR IT. BUT, YOU KNOW, THAT WAS SORT OF THE FEAR, THE CONCERN. I WAS WILLING TO WORK FOR HALF PRICE BUT IT WAS SET UP WHERE THAT NOBODY COULD OFFER ME HALF PRICE. HERE'S ANOTHER EXAMPLE OF A PRICE FLOOR: AGRICULTURAL PRODUCTS. LET ME JUST GET THIS LABOR AND UNEMPLOYMENT OUT OF HERE AND WE'LL GO BACK TO GOOD X. THE GOVERNMENT MAY SAY SOMETHING LIKE THIS. MAYBE THIS IS WHEAT NOW. THIS IS JUST HYPOTHETICALLY. WE COULD PUT VARIOUS THINGS IN HERE. BUT LET'S SAY THIS IS WHEAT AND THE PRICE OF WHEAT. THE GOVERNMENT MAY SAY SOMETHING LIKE THIS: "OKAY. WE WANT THE PRICE OF WHEAT TO BE FIVE DOLLARS A BUSHEL," AND THE MARKET CLEARING PRICE, THE EQUILIBRIUM PRICE, WITHOUT ANY GOVERNMENT INVOLVEMENT WILL BE FOUR DOLLARS A BUSHEL, LET'S SAY. SO THE GOVERNMENT SAYS, "WE WANT THE PRICE TO BE FIVE DOLLARS A BUSHEL." NOW, HERE'S THE WAY THIS OPERATES. FARMERS SAY, "OKAY. FIVE DOLLARS A BUSHEL FOR WHEAT. LET'S PRODUCE THIS QUANTITY," QUANTITY SUPPLIED. WE COME OVER AT THAT PRICE AND DOWN TO FIND OUT THE QUANTITY DEMANDED BY CONSUMERS SO WE HAVE A SURPLUS AMOUNT OF

6 ECO LECTURE ELEVEN 6 WHEAT. NOW, THERE'S ONE MORE THING IN THIS PARTICULAR CASE THAT THE GOVERNMENT DOES DO THAT IT DOESN'T ALWAYS DO FOR, LIKE, UNEMPLOYED LABOR. THE GOVERNMENT WILL COME ALONG AND BUY UP THIS SURPLUS. GOVERNMENT PURCHASES. AND THEY'LL PURCHASE THESE FARM COMMODITIES SOMETIMES. THEY'LL PURCHASE MILK AND TRY TO SUPPORT A HIGH PRICE FOR MILK. AND THE WAY THEY SUPPORT THE HIGH PRICE FOR MILK IS, THEY'LL COME ALONG AND SET THAT PRICE FLOOR AND THEN THERE'LL BE A SURPLUS OF MILK AND THE GOVERNMENT WILL BUY THAT MILK. AND YOU KNOW WHAT THEY DO WITH IT? THEY TURN IT INTO CHEESE 'CAUSE CHEESE WILL STORE AND MILK WILL NOT STORE SO VERY WELL. SO THEY TURN THAT MILK INTO CHEESE AND THEN THEY PUT IT -- ISN'T THERE UP IN KANSAS CITY A BUNCH OF THESE LIMESTONE CAVES? AND THEY TAKE THAT WHEAT AND PUT IT IN THERE -- OR WHEAT -- CHEESE AND PUT IT IN THERE. AND IT STAYS COOL. IT DOESN'T COST VERY MUCH TO STORE IT THERE AND IT'S THERE FOR A LONG PERIOD OF TIME. BUT IN THIS PARTICULAR CASE -- YOU KNOW, IF THE GOVERNMENT JUST SAID THIS. SUPPOSE THE GOVERNMENT JUST SAID, "OKAY, THERE'S A PRICE FOR IT. FIVE DOLLARS A BUSHEL FOR WHEAT." AND THEN THE FARMERS GREW THIS LARGE QUANTITY SUPPLIED AND CONSUMERS BOUGHT THIS SMALL QUANTITY DEMANDED, THEN THERE WOULD JUST BE A SURPLUS OF WHEAT. AND LET'S SAY THE GOVERNMENT DID NOT PURCHASE THAT SURPLUS. THEY JUST SAID, "AH, TOO BAD. SURPLUS OF WHEAT." THERE'D

7 ECO LECTURE ELEVEN 7 BE SOME FARMERS SITTING AROUND WITH THEIR SILOS FULL OF WHEAT, RIGHT? THERE'D BE A SURPLUS. AND THEN THOSE FARMERS WOULD SAY, "MAN, I'VE GOTTA GET RID OF THIS STUFF." AND HE'D SELL IT TO SOMEBODY FOR LESS THAN FIVE DOLLARS. THE GOVERNMENT CAN'T HAVE LIKE SOME BUREAUCRAT STANDING AROUND EVERY SILO, JUST STANDING THERE DAY AFTER DAY, MAKING SURE THAT NOBODY IS MOVING WHEAT OUT OF THERE AND SELLING IT FOR LESS THAN FIVE DOLLARS. SO THE POINT IS IS THAT IF THERE WAS THIS BIG SURPLUS OF WHEAT AND THE GOVERNMENT JUST SAID, "WE WANT THE PRICE TO BE FIVE DOLLARS AND NO HIGHER," THE GOVERNMENT WOULDN'T HAVE A WAY TO ENFORCE THAT. THE WHEAT WOULD GET SOLD ANYWAY. OR THEY WOULD USE IT TO FEED CATTLE OR HORSES, OR DO SOMETHING WITH IT. THEY WOULD NEVER BE ABLE TO MAINTAIN THAT FIVE DOLLAR PRICE. SO WHAT THE GOVERNMENT DOES, THEY SAY, "WE'RE GONNA HAVE TO SOMEHOW GET THAT SURPLUS UP OFF THE MARKET WHERE THESE FARMERS CAN'T SELL IT." SO THE GOVERNMENT WILL BUY IT AND STORE IT. AND THEN PRESUMABLY, LATER ON, THEY WILL SELL IT. LET'S GO BACK TO THIS QUESTION OF LABOR FOR JUST A SECOND. I WANT TO ASK YOU A QUESTION ABOUT THIS AND I WANT YOU TO THINK ABOUT IT. LET'S SAY THIS IS LABOR AGAIN. THIS IS A WAGE RATE. HERE'S THE QUANTITY OF X'S LABOR. HERE'S THE WAY THE MINIMUM WAGE WORKS AND MAYBE, LET'S SAY, EQUILIBRIUM WAGE IS FIVE DOLLARS AN HOUR AND WE SET A MINIMUM WAGE OF SIX DOLLARS AN HOUR. THE WAY THIS WORKS

8 ECO LECTURE ELEVEN 8 IS THE GOVERNMENT BASICALLY MAKES THIS REGULATION AND THEN IT TELLS EMPLOYERS, SENDS OUT A LITTLE FLYER THAT SAYS "HERE'S THE NEW MINIMUM WAGE. YOU MUST FOLLOW THIS LAW AND HERE'S THE PENALTIES IF YOU DON'T." SO THE EMPLOYERS ARE PAYING SIX DOLLARS AN HOUR AS OPPOSED TO FIVE DOLLARS. LET ME DRAW A COUPLE OF PICTURES HERE. HERE WE'VE GOT THE WORKER, HERE WE'VE GOT THE EMPLOYER. THE WORKER HANDS OVER LABOR SERVICES. THE EMPLOYER HANDS BACK MONEY, HOW MUCH -- IT WAS GONNA BE FIVE DOLLARS, LET'S SAY. PRETTY HANDSOME PICTURES, HUH? IN THE FIRST INSTANCE THEY GET READY TO HAVE A DEAL HERE OF, "I'LL HIRE YOU FOR FIVE DOLLARS." AND THEN THE GOVERNMENT COMES ALONG AND SAYS, "WE DON'T LIKE TO SEE THIS KIND OF A DEAL. WE WANT YOU TO PAY SIX DOLLARS." NOW, I GUESS IT'S KIND OF OBVIOUS THAT THIS TAKES ONE MORE DOLLAR AWAY FROM THIS EMPLOYER AND PUTS IT IN THE HANDS OF THIS EMPLOYEE, RIGHT? THE DOLLAR GOES FROM HERE OVER TO THERE, AN EXTRA DOLLAR. WHAT DO YOU THINK ABOUT THIS? THERE'S A LAW IN THE CONSTITUTION -- YOU KNOW, THEY WROTE THE CONSTITUTION AND THEN AT THE END THEY HAD THIS BILL OF RIGHTS WHICH ARE JUST AMENDMENTS, AND THEN THE FIFTH AMENDMENT TO THE CONSTITUTION, WHICH IS WHERE I'M SORT OF HEADED WITH THIS -- ARE YOU WITH ME SO FAR? THE FIFTH AMENDMENT TO THE CONSTITUTION WHICH IS IN THE BILL OF RIGHTS. I THINK MOST OF US HAVE HEARD THAT ONE, OR AT LEAST PART OF IT.

9 ECO LECTURE ELEVEN 9 THE FIFTH AMENDMENT'S THE ONE WHERE THEY, YOU KNOW, GET YOU ON THE STAND AND YOU SWEAR TO TELL THE TRUTH, AND THEN THEY SAY, "DID YOU SHOOT THAT GUY?" AND YOU GO, "I REFUSE TO ANSWER THAT ON THE GROUNDS THAT IT MAY INCRIMINATE ME," OR SOMETHING LIKE THAT. THAT'S THE FIFTH AMENDMENT. I THINK THEY'RE PROBABLY THINKING AT THAT POINT, "YOU DID SHOOT THAT GUY IF THAT'S WHAT YOU'RE SAYING." NORMALLY YOU WOULD SAY, "NO." THE FIFTH AMENDMENT GIVES YOU THE RIGHT TO JUST SAY, "NO, I'M NOT GONNA ANSWER THAT QUESTION. I DON'T HAVE TO INCRIMINATE MYSELF IN COURT OR WHEN I'M UNDER OATH," AND SO FORTH. BUT, YOU KNOW, THAT'S NOT ALL THE FIFTH AMENDMENT SAYS. THE FIFTH AMENDMENT ALSO HAS A CLAUSE IN IT -- AND AFTER, YOU KNOW, WE'VE ALREADY HEARD THESE OTHER WORDS -- AND IT SAYS "NOR SHALL" -- AND I'M TRYING TO GET THE WORDING AS CLOSE AS I CAN BUT IT'S PROBABLY NOT EXACT -- "NOR SHALL GOVERNMENT TAKE PUBLIC PROPERTY" -- ER, I'M SORRY -- "TAKE PRIVATE PROPERTY FOR PUBLIC USE WITHOUT PAYING JUST COMPENSATION." NOW, THAT'S CLOSE. THAT'S NOT PROBABLY EXACTLY RIGHT, BUT IT'S PRETTY CLOSE. AND THINK ABOUT THAT FOR JUST A MINUTE. THE BILL OF RIGHTS, IN ADDITION TO THIS YOU DON'T HAVE TO TESTIFY AGAINST YOURSELF. THIS SAYS RIGHT HERE THAT THE GOVERNMENT CANNOT JUST COME OUT AND GRAB UP YOUR HOUSE OR SOMETHING LIKE THAT AND SAY, "CLEAR OUT. WE WANT THAT." RIGHT? IT KIND OF MAKES SENSE.

10 ECO LECTURE ELEVEN 10 EVERY ONCE IN AWHILE YOU'LL HEAR ABOUT ONE OF THESE IMMINENT DOMAIN CASES THAT COMES TO THE PUBLIC'S ATTENTION. FOR EXAMPLE, WHEN SMS WANTED TO BUILD A BIG PARKING GARAGE SEVERAL YEARS BACK, THE HIGH-RISE PARKING GARAGE, THERE WAS A RESTAURANT THERE. AND SO THE SCHOOL CAME ALONG -- AND THE SCHOOL IS GOVERNMENT. YOU KNOW, THE UNIVERSITY HERE IS A PART OF GOVERNMENT. AND SO THE SCHOOL'S GOT IMMINENT DOMAIN RIGHTS AND THE SCHOOL CAME ALONG AND SAID, "HEY, WE WANT TO BUILD A PARKING GARAGE RIGHT HERE SO WE WANT TO BASICALLY MOVE YOU OUT, THIS RESTAURANT." AND THE RESTAURANT OWNERS SAYS, "DON'T WANT TO GO." AND THE GOVERNMENT SAID -- GOVERNMENT. THE SCHOOL SAID, "WHETHER YOU WANT TO GO OR NOT, THAT'S BESIDE THE POINT AND YOU MUST GO. WE HAVE THE POWER TO TAKE YOUR PROPERTY." THIS IS CALLED, BY THE WAY, THE TAKINGS CLAUSE. LET ME JUST KIND OF -- TAKINGS CLAUSE OF THE CONSTITUTION. THE GOVERNMENT HAS THE RIGHT TO TAKE YOUR PROPERTY FOR PUBLIC USE BUT NOT WITHOUT PAYING JUST COMPENSATION. AND JUST COMPENSATION IS NOT WHATEVER THEY FEEL LIKE; IT'S TRUE MARKET VALUE OF THAT PROPERTY, WHATEVER IT IS THAT THEY'RE TAKING. NOW, LET'S COME BACK TO THIS ISSUE RIGHT HERE. WE HAD A SITUATION WHERE THESE PEOPLE WERE WILLING TO STRIKE A BARGAIN FOR FIVE DOLLARS. WE'VE GOT A WORKER WHO'S WILLING TO WORK FOR FIVE DOLLARS; WE'VE GOT AN EMPLOYER THAT'S WILLING TO PAY FIVE DOLLARS.

11 ECO LECTURE ELEVEN 11 AND THEN THE GOVERNMENT COMES ALONG AND SAYS SOMETHING LIKE THIS: "I DON'T LIKE THIS DEAL YOU GUYS ARE WORKING OUT. WHAT I WANT YOU TO DO, MR. OR MISS EMPLOYER, IS I WANT YOU TO ADD A DOLLAR TO THAT. YOU EITHER ADD A DOLLAR TO IT OR WE'LL PUT YOU IN JAIL, LET'S PUT IT THAT WAY. CLOSE YOUR BUSINESS DOWN AND LOCK YOU UP. AND SO WE WANT YOU -- 'WE,' GOVERNMENT OFFICIALS -- WE WANT YOU TO ADD A DOLLAR TO THAT COST AND MAKE IT SIX." AND SO THERE GOES -- FROM THE EMPLOYER TO THE EMPLOYEE, THERE GOES A DOLLAR. NOW, LET'S GO BACK OVER THIS TAKINGS CLAUSE. AND ASK YOURSELF THIS. YOU'RE, YOU KNOW, NOT ON THE SUPREME COURT AND I'M NOT ON THE SUPREME COURT, BUT THINK ABOUT IT. WAS THERE ANY QUESTION, NUMBER ONE, ABOUT THIS IS GOVERNMENT THAT PASSES THE LAW. THERE'S OUR FIRST KEY WORD THERE, GOVERNMENT. IS THIS THE GOVERNMENT THAT PASSES THE LAW? ABSOLUTELY. FEDERAL GOVERNMENT, WASHINGTON, DC, AND SO FORTH. CONGRESS PASSES THE LAW, THE PRESIDENT SIGNS THE LAW. IS THIS DOLLAR THAT'S MOVING FROM ONE PERSON TO THE OTHER, IS THAT PRIVATE PROPERTY? DID THAT DOLLAR BELONG TO THE EMPLOYER TO BEGIN WITH? I THINK SO. I DON'T EVEN THINK IT'S DEBATABLE. DID THIS DOLLAR GET MOVED FOR PUBLIC USE? WELL, IT SORT OF IS OBVIOUS THAT IT'S PUBLIC USE. THE GOVERNMENT DECIDED, "WE WANT THAT DOLLAR TO BE TAKEN AWAY FROM THAT EMPLOYER AND HANDED TO THAT EMPLOYEE, THAT WORKER, FOR PUBLIC USE."

12 ECO LECTURE ELEVEN 12 IF YOU ASK THEM, "WHY ARE YOU DOING THIS?" THEY'LL GIVE YOU ALL KINDS OF GOOD REASONS THAT ARE SORT OF PUBLIC-Y REASONS. YOU KNOW, LIKE, "GOSH, THIS WORKER CAN'T LIVE ON FIVE DOLLARS AN HOUR AND NEEDS SIX DOLLARS AN HOUR. THAT'S A FAIR WAGE. IT'S UNFAIR TO TREAT THAT PERSON THAT WAY. IT UNDERMINES THEIR SELF-ESTEEM," OR WHATEVER. BUT THERE'S SOME PUBLIC USE THAT'S BEING SERVED. SO I DON'T THINK THERE'S ANY QUESTION WHETHER THIS IS PUBLIC USE. SO WHAT WE HAVE IS, THE GOVERNMENT TAKES PRIVATE PROPERTY FOR A PUBLIC USE. NOW, HERE'S THE NEXT QUESTION. DOES THE CONSTITUTION THEREFORE REQUIRE THE GOVERNMENT TO COME ALONG AND PAY THAT EMPLOYER ONE DOLLAR BACK? HERE'S FROM THE GOVERNMENT OVER HERE. SHOULD THE GOVERNMENT HAVE TO REPAY THAT EMPLOYER? LET ME TELL YOU RIGHT NOW THE ANSWER IS, THE GOVERNMENT DOES NOT PAY THAT EMPLOYER; THE GOVERNMENT SAYS, "YOU PAY YOUR EMPLOYEES AN EXTRA DOLLAR AN HOUR AND DON'T BE GIVING ME ANY BACK SASS," YOU KNOW -- THAT SORT OF THING. "JUST DO IT. THAT'S THE LAW." AND THE GOVERNMENT DOESN'T THEN SAY, "WELL, WE OWE YOU MONEY." BUT SHOULD THEY? IT SAYS IN THE CONSTITUTION THAT THE GOVERNMENT CANNOT TAKE PRIVATE PROPERTY FOR PUBLIC USE WITHOUT PAYING JUST COMPENSATION. SO SHOULD THE EMPLOYER BE ABLE TO GO TO THE GOVERNMENT AND SAY, "HEY, YOU OWE ME A DOLLAR, YOU KNOW -- A DOLLAR PER HOUR." NOW, MAYBE I'VE GOT A THOUSAND EMPLOYEES.

13 ECO LECTURE ELEVEN 13 AND A DOLLAR PER HOUR, EIGHT HOURS IN A DAY, THAT'S EIGHT THOUSAND DOLLARS A DAY. THAT'S FORTY THOUSAND DOLLARS A WEEK. THAT'S A MILLION DOLLARS A YEAR. DO YOU THINK IF THE EMPLOYER ASKED FOR THAT THEY'D GET IT? NO. BUT THAT'S WHAT THAT LAW SAYS. IF THE GOVERNMENT CAME OUT AND TOOK THE EMPLOYER'S, LET'S SAY, PLACE OF BUSINESS, THE BUILDING AWAY, THE GOVERNMENT WOULD HAVE TO PAY FOR THAT BUILDING. JUST THE WAY IT'S INTERPRETED BY THE SUPREME COURT, THEY SAY NO. BUT WHAT I'M SAYING TO YOU IS THAT SOME OF THESE LAWS -- AND I'M GONNA TALK ABOUT ANOTHER ONE HERE IN A MOMENT. LET'S TALK ABOUT RENT CONTROLS. THERE'S A GOOD EXAMPLE. LET'S SAY RENT CONTROLS -- WE START OFF WITH AN EQUILIBRIUM RENT FOR SOME APARTMENT IS FIVE HUNDRED DOLLARS AND LET'S SAY THE RENT CONTROL SAYS, "YOU CAN'T RENT THAT FOR MORE THAN THREE HUNDRED DOLLARS." SO WHAT WE HAVE IS A SIMILAR SITUATION. WE'VE GOT A LANDLORD THAT SAYS, "HEY, I WANT TO RENT THIS FOR FIVE HUNDRED BUCKS, WITHOUT ANY LAW." THE TENANT WOULD SAY, "FIVE HUNDRED BUCKS? OKAY, WE'VE GOT A DEAL." WE SHAKE HANDS. AND NOW ALONG COMES THE GOVERNMENT -- NOW, THIS IS NOT THE FEDERAL GOVERNMENT IN WASHINGTON. THIS WOULD BE LIKE THE CITY GOVERNMENT OF NEW YORK. BUT ALONG COMES THE GOVERNMENT. THEY PASS A LAW THAT SAYS RENT CONTROLS. THEY SAY, "WE WANT THIS LANDLORD TO RECEIVE TWO HUNDRED DOLLARS LESS EACH MONTH." AND

14 ECO LECTURE ELEVEN 14 THIS IS BASICALLY TRANSFERRING WEALTH AWAY FROM THE LANDLORD TOWARD THE TENANT, TWO HUNDRED DOLLARS A MONTH. SO THERE'S PRIVATE PROPERTY THAT'S BEEN TAKEN AWAY, TWO HUNDRED DOLLARS A MONTH, TWENTY-FOUR HUNDRED DOLLARS A YEAR. FOR PUBLIC USE? YEAH. AGAIN YOU ASK THAT GOVERNMENT AGENCY -- OR THE GOVERNMENT WHATEVER, CITY COUNCIL, WHOEVER IN NEW YORK PASSES THIS LAW -- "WHY DID YOU DO THAT?" AND THEY'LL SAY, "OH, WE'VE GOT ALL KINDS OF GOOD THINGS THAT WE'RE ACCOMPLISHING HERE WITH THIS POLICY. BUT WE'RE SERVING THE PUBLIC. WE'RE MAKING AFFORDABLE HOUSING POSSIBLE FOR, YOU KNOW, THE CITY'S LOW-INCOME PEOPLE," OR SOMETHING LIKE THAT. THEY'LL TELL YOU ABOUT A PUBLIC USE. SO IT'S GOVERNMENT TAKING PRIVATE PROPERTY FOR PUBLIC USE. DOES THE CITY GOVERNMENT OF NEW YORK COME ALONG AND PAY THIS LANDLORD TWO HUNDRED DOLLARS A MONTH AND SAY, "WE REALIZE THAT OUR POLICY HAS COST YOU TWO HUNDRED DOLLARS A MONTH AND WE REALIZE THAT WE OWE THAT TO YOU SINCE WE'VE TAKEN THAT MONEY AWAY FROM YOU. HERE IT IS." DOES THE CITY GOVERNMENT OF NEW YORK DO THAT? AND THE ANSWER IS NO. THE CITY GOVERNMENT OF NEW YORK SAYS, "YOU'LL KEEP YOUR RENT AT THREE HUNDRED DOLLARS OR ELSE WE WILL COME OUT HERE AND FINE YOU UNTIL BASICALLY THE VALUE OF YOUR APARTMENT IS GONE. WE'LL JUST FINE YOU AND FINE YOU AND FINE YOU, AND FINALLY YOU'LL SEE IT OUR WAY."

15 ECO LECTURE ELEVEN 15 THESE POLICIES HAD THE EFFECT -- AND I DON'T MEAN TO SAY ALL POLICIES, BUT MANY OF OUR POLICIES HAD THE EFFECT OF TAKING PRIVATE PROPERTY FOR PUBLIC USE. AND IF THEY COME OUT AND TAKE YOUR HOUSE AWAY, THAT'S SORT OF AN OBVIOUS THING AND THE COURTS WILL ALWAYS UPHOLD THAT -- OR I SHOULDN'T SAY ALWAYS. I THINK THEY WILL, BUT I SHOULDN'T SAY THAT 'CAUSE YOU CAN'T PREDICT THESE COURTS VERY WELL. BUT ALMOST ALWAYS THE COURTS ARE GONNA SAY, "THE GOVERNMENT CAN'T TAKE YOUR HOUSE AWAY FROM YOU WITHOUT COMPENSATING YOU," OR YOUR PLACE OF BUSINESS. BUT THE COURTS AREN'T SO PICKY ABOUT THE GOVERNMENT JUST TAKING HALF OF EVERYTHING YOU OWN, OR SOMETHING LIKE THAT. THEY'RE WILLING TO HAVE THAT HAPPEN AND NOT HAVE, YOU KNOW, THIS SORT OF CONSTITUTION KICK IN. SHOULD IT BE? DON'T KNOW. BUT AGAIN, ONE OF THE -- I MEAN, WE'RE NOT JUST TRYING TO UNDERSTAND THE OPERATION OF THE MARKET ECONOMY. WE'RE TRYING TO ALSO UNDERSTAND HOW A MARKET ECONOMY IS AFFECTED BY GOVERNMENT POLICIES. THIS IS THE COLLEGE OF HUMANITIES AND PUBLIC AFFAIRS. AND SO IN TERMS OF THE PUBLIC AFFAIRS, THESE TYPES OF POLICIES THAT WE'RE TALKING ABOUT, EITHER A MINIMUM WAGE OR RENT CONTROL AND THERE ARE OTHERS, THOSE TYPES OF PUBLIC POLICIES -- THOSE AFFECT THE ECONOMY, THEY AFFECT THE PEOPLE IN THE ECONOMY, AND SOMETIMES THERE ARE LAWS THAT WOULD PREVENT THESE POLICIES. TO GIVE YOU ONE MORE TAKINGS CLAUSE CASE THAT CAME UP HERE

16 ECO LECTURE ELEVEN 16 AWHILE BACK -- IT'S BEEN A FEW YEARS AGO NOW. BUT LET'S SAY THAT THIS IS THE ATLANTIC OCEAN AND HERE'S SOUTH CAROLINA. A FEW YEARS BACK THERE WERE -- A SITUATION LIKE THIS EXISTED. THERE WERE A BUNCH OF HOUSES ALONG THE BEACH IN THIS ONE AREA IN SOUTH CAROLINA. AND A GUY CAME ALONG AND SAID, "OH, YOU KNOW, THESE ARE NICE HOUSES ALONG THE BEACH. I NOTICE THERE'S SOME BEACHFRONT PROPERTY RIGHT HERE. KIND OF ATTRACTIVE. I LIKE THIS PLACE. YOU KNOW, YOU CAN SEE A LOT OF WATER FROM HERE." AND SO THIS GUY CAME ALONG AND HE BOUGHT THIS PROPERTY. AND I THINK HE PAID SOMETHING LIKE A MILLION DOLLARS FOR IT. BUT, I MEAN, HE PAID A LOT FOR THIS PROPERTY. SO HE OWNS IT. AND THEN -- BUT AFTER HE PAID FOR THE PROPERTY HE WASN'T READY TO BUILD A HOUSE YET. I'M JUST SURE THAT AFTER YOU BUY A MILLION DOLLAR PIECE OF LAND YOU'RE STILL TRYING TO SCRAPE TOGETHER THE MONEY TO BUILD SOMETHING. AND SO WHAT HAPPENS IS, THIS GUY KIND OF WAITS FOR AWHILE AND THEN IT'S FINALLY TIME TO BUILD A HOUSE. AND SO HE GOES DOWN TO GET HIS BUILDING PERMIT AND THE CITY WHERE THIS IS LOCATED SAID, "WE HAVE DECIDED NOT TO ISSUE A BUILDING PERMIT TO YOU." AND HE SAYS, "YOU DID WHAT?" THEY SAID, "WE HAVE DECIDED NOT TO ISSUE A BUILDING PERMIT." AND HE SAYS, "WELL, WHY NOT?" AND THEY SAID, "THIS IS REAL DANGEROUS HAVING HOUSES UP HERE BY THE BEACH, YOU KNOW. HURRICANES COME ALONG AND KNOCK THE HOUSES DOWN. WHEN A HURRICANE HITS ONE OF THESE HOUSES,

17 ECO LECTURE ELEVEN 17 THEN THE WOOD AND THE BRICKS AND EVERYTHING JUST BECOME FLYING PROJECTILES AND HIT OTHER PEOPLE. AND, I MEAN, THIS IS JUST A BAD SITUATION ALL AROUND, AND SO WE DECIDED NO MORE BUILDING ALONG THE BEACH. WE'RE SORT OF AGAINST THAT." AND THE GUY SAID, "WOW, I WISH SOMEBODY WOULD'VE TOLD ME BEFORE I SPENT A MILLION DOLLARS ON THAT LAND." CAN YOU IMAGINE? I MEAN, YOU SCRAPE TOGETHER EVERYTHING YOU CAN, YOU BUY A MILLION DOLLAR PIECE OF LAND, AND NOW YOU'RE TOLD THAT ALL IT'S EVER GONNA BE IS A BEACH? AND, YEAH, OF COURSE YOU CAN GO DOWN THERE AND THROW YOUR TENT UP AND LIVE ON THE BEACH, BUT SO CAN ANY OTHER PERSON JUST WALKING UP AND DOWN THE BEACH. GO, "OH, THIS LOOKS LIKE A NICE PLACE," AND JUST SIT DOWN RIGHT THERE. YOU DON'T HAVE ANYTHING THAT THE NEXT GUY DOESN'T HAVE. I MEAN, THE FACT THAT YOU PAID THE MILLION DOLLARS DOESN'T GIVE YOU SPECIAL PRIVILEGES. SO THIS GUY SAID, "MAN, THIS SEEMS LIKE AN UNFAIR POLICY." AND THEY SAID, "DOESN'T SEEM UNFAIR TO US. WE ARE PROTECTING THE PUBLIC'S WELFARE." AND HE SAID, "YOU KNOW, WHAT I THINK I'M GONNA DO IS I THINK I'M GONNA HIRE A LAWYER." AND THEY SAID, "WELL, GO AHEAD," YOU KNOW. "HIRE A LAWYER IF YOU WANT. YOU'LL JUST SPEND THE REST OF THAT MONEY." AND SO THEN HE HIRED A LAWYER AND HE SUED THE CITY AND HE WON. AND SO THEN THE CITY SAID, "WELL, WE CAN'T HAVE THAT," AND THEY SUED HIM BACK -- YOU KNOW, APPEALED THE CASE -- AND THEY

18 ECO LECTURE ELEVEN 18 WON IN APPEALS. AND THEN THIS GUY SAID, "MAN, NOW YOU'RE MAKING ME UNHAPPY." AND SO THEN HE APPEALED THAT CASE AND IT ENDED UP IN THE SUPREME COURT. U.S. SUPREME COURT. AND WHAT DID HE SAY? WHAT WAS THE ARGUMENT HE MADE? HE MADE THIS ARGUMENT ABOUT TAKINGS. HE SAID, "LOOK. THE GOVERNMENT CAME ALONG AND THEY TOOK MY PROPERTY. THEY DIDN'T ACTUALLY TAKE IT AWAY FROM ME, BUT THEY TOOK AWAY FROM ME THE RIGHT TO USE MY PROPERTY. I DIDN'T EVEN WANT THE PROPERTY IF IT'S JUST GOT TO BE SAND SITTING OUT THERE ON THE BEACH. THAT WASN'T SOMETHING I WANTED. I WANTED A BUILDING SITE AND THEY TOOK MY BUILDING SITE AWAY FROM ME." SO IT'S GOVERNMENT ACTION AND THEY'RE TAKING PRIVATE PROPERTY FOR SOME PUBLIC USE -- THEY'VE TOLD WHAT THIS WAS -- AND THEY NEVER COMPENSATED ME. SO HE SAID, "I WANT MY MILLION DOLLARS PLUS INTEREST." AND THIS IS THE ARGUMENT HE'D BEEN MAKING ALL THE WAY ALONG. HE WON IT THE FIRST TIME, HE LOST IN THE APPEAL, AND SO NOW HE APPEALS TO THE SUPREME COURT. AND THE SUPREME COURT SAID, "OH, MAN. THIS IS A GOOD CASE." YOU KNOW, A LOT OF CASES THAT COME BEFORE THE SUPREME COURT, THEY JUST SAY "THIS IS NOT REALLY INTERESTING. WE WON'T DECIDE THIS. WE'LL JUST -- WHATEVER THE APPEALS COURT SAID, THAT'S GOOD ENOUGH." BUT HERE THE SUPREME COURT SAID, "THIS IS A GOOD CASE." SO THEY TOOK THE CASE ON AND SPENT A FEW MONTHS THINKING ABOUT IT,

19 ECO LECTURE ELEVEN 19 AND THEY CAME BACK AND THEY SAID, "YOU KNOW, YOU'RE RIGHT. THEY CAN'T DO THAT WITHOUT COMPENSATING YOU." AND SO WHAT HAPPENED IS, THE SOUTH CAROLINA CITY LOST THE CASE, THIS GUY WON THE CASE, HE DID GET COMPENSATED. AND THIS WAS CONSIDERED TO BE A BIG WATERSHED FOR THE TAKINGS CLAUSE IN THE CONSTITUTION BECAUSE HERE'S WHAT A LOT OF PEOPLE THOUGHT. THEY SAID, YOU KNOW, "THIS TAKINGS CLAUSE, IT DOESN'T WORK UNLESS THEY ACTUALLY TAKE THAT LAND AWAY FROM YOU AND JUST SAY 'DON'T COME ON THIS LAND. WE'RE PUTTING UP A FENCE AROUND IT AND YOU CAN'T COME BACK.'" AND THAT'S THE ARGUMENT THEY WERE MAKING, BASICALLY. "HEY, WE NEVER TOOK ANYTHING. IF HE WANTS TO COME OUT HERE AND GET ON HIS LAND, HE CAN DO IT." AND HIS ARGUMENT WAS, "IT DOESN'T HAVE TO BE GONE FOR ME TO, YOU KNOW, HAVE LOST SOMETHING. LOSING THE RIGHT TO BUILD ON THIS LAND, I LOST SOMETHING." AND SO THAT WAS HIS ARGUMENT. THE SUPREME COURT AGREED WITH HIM. AND BASICALLY WHAT HAPPENED IS, THAT BECAME A THREAT -- THERE HAVE BEEN OTHER CASES SINCE THEN, AND THIS WAS BACK IN ABOUT -- I'M GONNA SAY 1992 OR '93, SO IT'S BEEN SEVERAL YEARS AGO NOW. BUT IN '92 OR '93, WHENEVER THE SUPREME COURT CAME BACK AND DECIDED THIS CASE, IT WAS SORT OF A TURNING POINT. AND IT PUT CITIES AND STATES, AND SO FORTH, AND COUNTIES -- IT PUT THEM ON NOTICE TO BE CAREFUL IN JUST EXACTLY WHAT LAWS THEY PASSED BECAUSE SOME OF THOSE LAWS THEY'RE GONNA HAVE TO PAY COMPENSATION.

20 ECO LECTURE ELEVEN 20 NOW, YOU KNOW, THAT'S NOT A BIG DEAL IF THEY'RE JUST COMING OUT AND TAKING A HOUSE TO BUILD A PARKING GARAGE. THEY KNOW ABOUT THAT IN ADVANCE. BUT SOME OF THESE LAWS THE GOVERNMENT WILL PASS, THEY MIGHT SAY, "OH, YOU CAN'T BUILD UP AND DOWN THE BEACH" AND THERE MIGHT'VE BEEN A HUNDRED EMPTY PROPERTIES. AND MAYBE THAT CITY WOULD THINK, "AW, THIS IS NO BIG DEAL." BUT THEN THERE'D BE LIKE A HUNDRED PEOPLE SUING FOR A MILLION DOLLARS APIECE. THAT'D PUT 'EM OUT OF BUSINESS. SO THE POINT IS, THESE POLICES -- AND HERE'S ANOTHER ONE. THIS HAS NEVER BEEN DECIDED THIS WAY, BUT LET'S TAKE THE MINIMUM WAGE. IF THE MINIMUM WAGE WAS EVER CONSIDERED TO FALL UNDER THE TAKINGS CLAUSE AND THE SUPREME COURT SAYS, "HEY, THE GOVERNMENT OWES EMPLOYERS MONEY FOR THAT," OH, MAN. THERE WOULD BE MILLIONS OF EMPLOYEES OUT HERE EARNING THE MINIMUM WAGE. EACH ONE OF 'EM WORKING POTENTIALLY TWO THOUSAND HOURS APIECE. SO THAT'D POTENTIALLY BE LIKE THE GOVERNMENT OWING EMPLOYERS TWO THOUSAND DOLLARS APIECE EVERY SINGLE YEAR FROM MILLIONS OF EMPLOYEES. THIS WOULD RUN INTO TENS OF BILLIONS, MAYBE HUNDREDS OF BILLIONS OF DOLLARS. NOW, THEY HAVEN'T DONE IT YET, BUT THE POINT IS IS THAT THESE GOVERNMENTS HAVE TO BE CAREFUL WHEN THE SUPREME COURT IS TAKING A SORT OF A MORE -- WHAT WOULD WE SAY -- MORE STRICT INTERPRETATION OF THESE LAWS. IT MAKES THE GOVERNMENTS BE A

21 ECO LECTURE ELEVEN 21 LITTLE BIT MORE CAREFUL IN TERMS OF WHAT LAWS THEY PASS. WHEN THE GOVERNMENT PASSES A LAW, IT'S TRANSFERRING OWNERSHIP OF PROPERTY OR WEALTH -- I MEAN, VERY OFTEN. AND SO THESE ISSUES ARE IF NOT IN THE FOREGROUND, THEY'RE AT LEAST IN THE BACKGROUND OF MANY THINGS TAKING PLACE. A SIMILAR CASE, BY THE WAY, CAME UP SHORTLY AFTER THIS ONE IN SOUTH CAROLINA. IT WAS A CASE OUT IN CALIFORNIA AND SOME GUY CAME ALONG AND SAID, "HEY, I WANT TO IMPROVE" -- I BELIEVE IT WAS IMPROVE. HE MIGHT'VE BEEN BUILDING A HOUSE, BUT I THINK HE WAS MAKING MAJOR IMPROVEMENTS. AND OUT THERE, THE ZONING RULE WAS YOU CAN ONLY IMPROVE YOUR HOUSE IF YOU'RE WILLING TO BASICALLY PLAY BALL WITH THEM. "WE'D LIKE YOU TO BUILD A SIDEWALK RIGHT NEXT TO YOUR HOUSE GOING FROM THE STREET TO THE BEACH. NOW, WE WANT THAT SIDEWALK THERE SO PEOPLE COULD PARK OUT ON THE STREET IN FRONT OF YOUR HOUSE AND THEN WALK TO THE BEACH." AND THIS GUY SAID, "HUH, I DON'T THINK SO. THIS IS MY HOUSE; THIS IS MY LAND; I WANT TO IMPROVE IT. THERE'S OTHER HOUSES UP AND DOWN THE BEACH THERE THAT'S BEING IMPROVED. I WANT TO IMPROVE MINE, AND I DO NOT WANT TO MAKE A PARKING LOT OUT IN FRONT OF MY HOUSE AND, YOU KNOW, LIKE A SIDEWALK RIGHT NEXT TO MY HOUSE. DON'T WANT TO DO IT." AND THE CITY, OR COUNTY, WHOEVER IT WAS, THEY SAID, "WELL, WE'RE GONNA MAKE YOU." THIS GUY GOES TO THE COURTS AND THEN UNDER THIS NEWLY DECIDED DECISION THAT WE WERE JUST TALKING

22 ECO LECTURE ELEVEN 22 ABOUT BEFORE, THIS GUY WON OUT IN CALIFORNIA. SO THERE WERE TWO CASES, ACTUALLY, THAT CAME ALONG SORT OF IN SHORT ORDER. IN EACH CASE THE PROPERTY OWNER WON AND IN EACH CASE THAT PUT THESE CITIES AND COUNTIES, AND SO FORTH, SORT OF ON NOTICE THAT THEY'D BETTER BE CAREFUL WHAT THEY DID. LET'S TAKE ANOTHER POLICY. WE'VE GOT PRICE CEILINGS, PRICE FLOORS -- I'LL DRAW THIS ONE RIGHT HERE. THIS THIRD TYPE OF POLICY THAT WE'LL TALK ABOUT, LET ME JUST CALL THAT SUPPLY CONSTRAINT. SAME DIAGRAM TO BEGIN WITH. WE'VE GOT THE EQUILIBRIUM PRICE AND QUANTITY, P1 Q1. WITH THE SUPPLY CONSTRAINT, HERE'S WHAT WE'RE TALKING ABOUT NOW IF YOU WANT TO SORT OF WRITE A SHORT DEFINITION DOWN. A SUPPLY CONSTRAINT IS A POLICY THAT LIMITS ENTRY INTO A MARKET BY SUPPLIERS. IT LIMITS ENTRY. OR THE EXISTING SUPPLIERS ARE ALREADY THERE. IT TELLS THEM TO REDUCE THEIR PRODUCTION. A SUPPLY CONSTRAINT DOES EITHER OF TWO THINGS, OR MAYBE BOTH. BUT IT RESTRICTS ENTRY BY SUPPLIERS. IT KEEPS SUPPLIERS OUT OF THIS MARKET. IF THEY WANT TO COME IN, "NO, YOU CAN'T." OR IT TELLS THE SUPPLIERS THAT ARE ALREADY THERE, "REDUCE YOUR PRODUCTION." SO IT'S RESTRAINING THE SUPPLY OF THE MERCHANDISE, THE GOOD OR SERVICE. HERE'S WHAT IT DOES TO THE CURVE. S2, THE SUPPLY CURVE, SHIFTS TO THE LEFT AND THE EQUILIBRIUM PRICE GOES UP, THE P2. NOW, WHO IN GOVERNMENT DOES THIS? YOU KNOW, WHAT GOVERNMENT POLICIES ARE

23 ECO LECTURE ELEVEN 23 THERE THAT LIMIT SUPPLY? WELL, LET ME GIVE YOU SEVERAL EXAMPLES. LET ME ALSO ADD, BY THE WAY, THAT SOME OF THESE LAWS ARE BEING PHASED OUT IN THE LAST -- OH, THE LAST DECADE, THE LAST FIFTEEN YEARS OR SO, BEING GRADUALLY PHASED OUT. BUT THEY'RE FOR SURE NOT GONE AND THE IDEA IS NOT FORGOTTEN, SO IT'S NOT A THING OF THE PAST. BUT ANYWAY, IF YOU THINK ABOUT THE FEDERAL COMMUNICATIONS COMMISSION -- F.C.C, FEDERAL COMMUNICATIONS COMMISSION. A LOT OF WHAT THE FEDERAL COMMUNICATIONS COMMISSION HAS DONE OVER THE YEARS IS IT RESTRICTS ENTRY INTO THE COMMUNICATIONS INDUSTRY. FOR EXAMPLE, THE FEDERAL COMMUNICATIONS COMMISSION, IT RESTRICTED ENTRY INTO THE TELEPHONE BUSINESS FOR MANY YEARS. WE HAD -- AT&T WAS THE LONG-DISTANCE TELEPHONE PROVIDER AND OTHER LONG- DISTANCE TELEPHONE COMPANIES COULD NOT COME INTO THE BUSINESS, JUST COULDN'T DO IT. THERE WAS AN AGREEMENT BETWEEN AT&T AND THE GOVERNMENT, AND THE AGREEMENT BASICALLY SAID -- AND THIS AGREEMENT WAS FROM BACK IN THE '50S -- AND THE AGREEMENT SAID SOMETHING LIKE THIS: "OKAY, AT&T. WE, THE GOVERNMENT, WE'LL REGULATE YOUR PRICE, TELL YOU HOW MUCH YOU CAN CHARGE ON LONG- DISTANCE TELEPHONE CALLS, BUT WE WILL -- IN TURN, WE'LL KEEP THE COMPETITION OUT OF THE MARKET." AND SO THERE WAS A SUPPLY CONSTRAINT. HOW ABOUT TELEVISION BROADCASTING? YOU KNOW, WE'VE GOT THESE TRADITIONAL BROADCASTERS. I'M NOT TALKING ABOUT CABLE TV

24 ECO LECTURE ELEVEN 24 COMPANIES NOW, BUT THE TRADITIONAL BROADCASTERS THAT PUT THEIR SIGNALS OUT OVER THE WAVES: ABC, CBS, NBC. WHY WERE THEY THE BIG THREE NETWORKS FOR YEARS AND YEARS AND YEARS AND THAT'S IT? AND THE ANSWER IS, BECAUSE YOU'D HAVE TO GET PERMISSION FROM THE FCC TO START UP ANOTHER NETWORK AND TO HAVE, WHAT, BROADCASTERS IN EACH TOWN, AND SO FORTH. AND THE FCC LIKED IT WHERE IT WAS. AND THE FCC ALSO THEN -- AFTER IT RESTRICTED ENTRY, THEN IT REGULATED THOSE BROADCASTERS AND SAID THINGS LIKE, "OH, YOU CAN'T HAVE THOSE SEXY THINGS ON TV" OR "YOU CAN'T USE CUSS WORDS ON TV," OR WHATEVER. AND "YOU'VE GOT TO TREAT POLITICAL ISSUES IN A CERTAIN WAY OR ELSE." AND SO THE GOVERNMENT WAS REGULATING ENTRY. AND WHEN THEY REGULATE ENTRY, THE PRICE GOES UP AND THEN THE GOVERNMENT SAYS, "WELL, WE'VE DONE YOU A FAVOR AND NOW YOU'RE GONNA DO US A FAVOR. YOU'RE GONNA NOT BROADCAST CERTAIN THINGS IF WE DON'T LIKE IT." NOW, THOSE LAWS HAVE SINCE BEEN PHASED OUT PRETTY MUCH ALTOGETHER, BUT -- SORT OF FCC RESTRICTED ENTRY. WHO ELSE IS RESTRICTED? HOW ABOUT THE C.A.B., CIVIL AERONAUTICS BOARD? THE CIVIL AERONAUTICS BOARD, THAT REGULATED ENTRY INTO THE AIRLINE INDUSTRY -- YOU KNOW, TWA AND -- WHAT ARE A FEW OF THESE -- SOUTHWESTERN AND MIDWEST AIR, AND WHATEVER. I DON'T EVEN KNOW THE NAMES OF ALL OF THEM. BUT FOR YEARS AND YEARS AND YEARS, IF YOU WANTED TO START UP A NEW AIRLINE, YOU'D GO

25 ECO LECTURE ELEVEN 25 TO THE C.A.B., CIVIL AERONAUTICS BOARD, AND SAY, "HEY, I WOULD LIKE A LICENSE TO START UP A NEW AIRLINE" AND THEY'D SAY, "WELL, TOO BAD, 'CAUSE YOU KNOW YOU'RE NOT GETTING ONE." OR HOW ABOUT THE I.C.C., THE INTERSTATE COMMERCE COMMISSION? I.C.C., INTERSTATE COMMERCE COMMISSION. WHAT THE INTERSTATE COMMERCE COMMISSION DID IS THEY REGULATED INTERSTATE COMMERCE. THIS WAS MAINLY THE TRANSPORTATION SYSTEM, MAINLY TRUCKING AND RAILROADS. AND SO WHAT THEY WOULD DO IS, THEY WOULD PREVENT NEW TRUCKING COMPANIES FROM -- AND NOT NECESSARILY JUST SAY, "YOU CAN'T START A NEW TRUCKING COMPANY," BUT MORE OF A "WE'VE GOT A SERIES OF REGULATIONS YOU HAVE TO LIVE BY. AND IF YOU DON'T, YOU CAN'T GET A LICENSE. OR IF YOU BREAK ONE OF THESE RULES WE'LL TAKE YOUR LICENSE AWAY." WHAT THE I.C.C. DID IS AFTER IT RESTRICTED ENTRY, THEN PRICES WENT UP. THE I.C.C. SAID, "WELL, WHAT WE WANT TO DO NOW IS REGULATE PRICES. WE'RE GONNA TELL YOU WHAT PRICES TO" -- AND BY THE WAY, IT WAS THIS WAY. WE'LL TELL YOU WHAT PRICES TO CHARGE." THE I.C.C. USED TO HAVE -- I THINK THE NUMBER IS TEN BILLION. IT COULD BE A DIFFERENT NUMBER. BUT TEN BILLION DIFFERENT RATES THAT YOU COULD CHARGE DEPENDING ON WHAT YOU WERE CARRYING. BUT IF YOU HAD A TRUCKING COMPANY AND YOU WERE CARRYING THINGS, LET'S SAY, BETWEEN HERE AND SAN DIEGO, CALIFORNIA, THE I.C.C. WOULD HAVE A RATE FOR THAT THING. AND SO YOU WOULD GO TO THEM AND SAY SOMETHING LIKE THIS: "I'M TAKING DRY ICE FROM SPRINGFIELD, MISSOURI,

26 ECO LECTURE ELEVEN 26 TO SAN DIEGO, CALIFORNIA." AND THEN THEY WOULD LOOK FOR -- "DRY ICE, HMMMMM. SPRINGFIELD TO SAN DIEGO," AND THEY WOULD HAVE A FARE FOR THAT. AND THEY WOULD TELL YOU, "HERE'S WHAT YOU CAN CHARGE FOR THAT SERVICE." NOW, WHY WOULD THESE TRUCKING COMPANIES PUT UP WITH THAT? AND THE ANSWER IS, WELL, BECAUSE THE I.C.C. -- THEY WERE KEEPING THE COMPETITORS OUT OF THAT MARKET. AND SO FEWER COMPETITORS IN THE MARKET, THE PRICE STARTS GOING UP. THE TRUCKING COMPANIES LIKE THAT. AND THEN THE I.C.C. SAYS, "WELL, SINCE YOU LIKE THAT SO MUCH, WE'RE GONNA SORT OF REGULATE THIS." AND THE PRICES WERE STILL HIGH. OH, MAN. IT COSTS A LOT MORE TO HAUL THINGS BETWEEN TWO CITIES. IT COST A LOT MORE TEN OR TWENTY YEARS AGO THAN IT DOES TODAY. AND THE I.C.C. HAD OTHER RULES LIKE THIS: "OKAY. IF YOU HAUL SOMETHING FROM, LET'S SAY, SPRINGFIELD TO SAN DIEGO AND YOU LET IT OFF THERE, THEN BRING YOUR TRUCK ON BACK BUT DON'T FILL IT UP." AND SO THEY WOULD HAVE TO DRIVE THEIR TRUCK BACK EMPTY AND THEN FILL IT UP AGAIN AND GO SOMEPLACE ELSE AGAIN. BUT THEY HAD TO GO BACK TO SORT OF HOME BASE IN ORDER TO FILL UP THEIR TRUCK AGAIN. THEY COULDN'T JUST GET OUT AND SAY, "OKAY. WE CARRIED SOMETHING TO SAN DIEGO. WE'LL PICK SOMETHING ELSE UP AND GO TO CHICAGO WITH IT, DUMP IT OFF AND PICK SOMETHING UP AND GO TO NEW YORK AND DUMP THAT OFF, AND PICK SOMETHING ELSE UP AND COME TO SPRINGFIELD," AND JUST SORT

27 ECO LECTURE ELEVEN 27 OF PICK THINGS UP AS THEY GO. COULDN'T DO IT. THE I.C.C. WOULDN'T ALLOW THAT. AND SO YOU HAVE THESE TRUCKS. THEY WERE HAULING SOMETHING AND THEY'D CHARGE YOU FOR A ROUND TRIP BECAUSE THE TRUCK'S GOTTA GO HOME AGAIN, BUT THE TRUCK'S EMPTY HALF THE TIME SO IT WAS EXTREMELY EXPENSIVE TO HAUL ANYTHING. SO, YEAH, THE GOVERNMENT HAS DONE A GOOD DEAL OF THIS. LET ME GIVE YOU A COUPLE OF OTHER EXAMPLES. HOW ABOUT BLUE LAWS? OH, I WISH I HAD MY MARKER WITH ME THAT WAS BLUE. YOU KNOW WHAT A BLUE LAW IS? I THINK WE STILL HAVE THOSE IN MISSOURI SOME PLACES. EACH COUNTY DECIDES FOR ITSELF. BUT WHAT A BLUE LAW IS, IS THAT'S A LAW THAT ALLOWS EACH COUNTY TO DECIDE IF THE STORES ARE GONNA BE CLOSED ON SUNDAY. OR, IF NOT CLOSED, RESTRICT CERTAIN THINGS THAT CANNOT BE SOLD ON SUNDAY. AND THE WAY IT USED TO OPERATE BACK WHEN WE HAD A BLUE LAW IN THIS COUNTY -- AND THAT'S BEEN YEARS AGO. BUT THE WAY IT WOULD OPERATE IS, NECESSITIES COULD BE SOLD ON SUNDAY BUT NOT OTHER THINGS. LIKE, IF YOU WANTED TO BUY -- GO TO THE GROCERY STORE AND BUY SOME -- LIKE THOSE CINNAMON ROLLS THAT I LIKE TO EAT ON A SATURDAY OR SUNDAY MORNING. MMMMM. YOU COULD BUY THOSE. THAT'S A NECESSITY. SUNDAY -- NECESSITY. BUT IF YOU WANTED TO GO AND BUY, LET'S SAY, A T-SHIRT, COULDN'T BUY IT. THAT'S CLOTHES; THAT'S NOT A NECESSITY. YOU CAN GET THOSE TOMORROW. HARDWARE STORE? NOT

28 ECO LECTURE ELEVEN 28 ON SUNDAY. SO WE HAD THOSE BLUE LAWS. THAT RESTRICTS -- IT DIDN'T KEEP YOU FROM GETTING INTO THE BUSINESS. BUT IF YOU'RE IN THE BUSINESS, IT LIMITS WHAT YOU CAN DO ON SUNDAY, ONE DAY A WEEK. NOW, WHO'S FOR THESE BLUE LAWS? NOW, LET ME TELL YOU WHAT MOST PEOPLE THINK AND THEN YOU CAN THINK ABOUT THE REST. HERE'S WHAT MOST PEOPLE THINK. THE BLUE LAWS, THAT'S SUPPORTED BY, YOU KNOW, PEOPLE THAT, LET'S SAY, GO TO CHURCH A LOT AND SOMEHOW WANT TO KEEP THAT SUNDAY SORT OF A DAY OF PEACE AND QUIET AND REST AND NOT A DAY OF COMMERCE. BUT MOST PEOPLE THINK THIS IS A RELIGIOUS THING AND TO SOME EXTENT IT IS. BUT THERE'S A BIG ECONOMIC INTEREST IN THESE BLUE LAWS. LET'S SAY YOU OWN A STORE IN SPRINGFIELD, MISSOURI. HERE'S WHAT YOU'RE THINKING: "YOU KNOW, THERE'S ONLY SO MUCH MONEY TO BE SPENT IN SPRINGFIELD, MISSOURI. AND WE AND THE OTHER STORES IN TOWN, WE'RE GETTING THAT AMOUNT OF MONEY. BUT IF WE WOULD ALL AGREE TO CLOSE OUR DOORS ON SUNDAY, LET'S SAY, AND JUST DO BUSINESS SIX DAYS A WEEK, WE'D STILL GET ALL THE MONEY OF ALL THE PEOPLE IN SPRINGFIELD. SO WE'D GET THE SAME AMOUNT OF MONEY BUT ONE DAY A WEEK WE WOULDN'T HAVE ANY WAGES TO PAY. WE'D TELL THE EMPLOYEES TO GO HOME AND WE WOULDN'T PAY 'EM. WE WOULDN'T HAVE TO PAY FOR THE UTILITIES THAT DAY -- YOU KNOW, OF KEEPING THE LIGHTS ON AND SO FORTH. AND SO WE COULD LOWER OUR COSTS IN DOING BUSINESS BY SHUTTING DOWN ONE DAY A WEEK."

29 ECO LECTURE ELEVEN 29 NOW, THAT'S TRUE ANYTIME, OF COURSE. ANY BUSINESS COULD JUST SHUT DOWN ONE DAY A WEEK AND SAVE SOME MONEY, LOWER ITS COST OF DOING BUSINESS. BUT IF YOU ARE THE ONLY ONE AND YOU SHUT DOWN ON SUNDAY, AND EVERYBODY ELSE IS IN BUSINESS ON SUNDAY, THEN WHAT HAPPENS IS YOU LOSE YOUR SUNDAY CUSTOMERS BUT THEY GO TO ANOTHER STORE. THEY SPEND THE MONEY THERE. AND SO THEN ON MONDAY, YOU DON'T GET THAT MONEY BACK. IT DOESN'T COME BACK TO YOU. BUT IF EVERYBODY WILL AGREE TO CLOSE THE STORES ON SUNDAY, THEN THE CUSTOMER DOESN'T GO ACROSS THE STREET OR DOWN, YOU KNOW, TO THE MALL OR SOMETHING LIKE THAT AND SPEND THEIR MONEY. THEY DON'T SPEND THEIR MONEY ON SUNDAY, THEY'VE GOT IT ON MONDAY, SO THEY COME BACK TO YOU AND SPEND. YOU DIDN'T LOSE ANYTHING THAT WAY. BUT WE GOTTA ALL AGREE. AND SO THE BUSINESS COMMUNITY, THE RETAIL BUSINESS COMMUNITY, THEY WERE REALLY BEHIND THE BLUE LAWS. THEY LIKE THAT. IT LOWERS THEIR COST OF DOING BUSINESS BY ABOUT ONE-SEVENTH, THEIR VARIABLE COST, THEIR LABOR COST AND SO FORTH. IT LOWERS THEIR COST BY ONE-SEVENTH AND THEY GET THE SAME AMOUNT OF REVENUE IN A WEEK, AND SO THEIR PROFITS GO UP. THIS IS A SUPPLY CONSTRAINT. WHO'S AGAINST THAT? IT'S CUSTOMERS THAT ARE AGAINST THAT. THE CUSTOMERS ARE SAYING THINGS LIKE THIS: "YEAH, OKAY. YOU SHUT DOWN FOR ONE DAY A WEEK. THAT GIVES ME SIX DAYS TO DO ALL MY SHOPPING RATHER THAN SEVEN. THAT MEANS I HAVE TO DO SOMETHING

30 ECO LECTURE ELEVEN 30 LIKE RUN A QUICK ERRAND DURING MY LUNCH BREAK. OR AS SOON AS I GET OFF WORK, RATHER THAN GO HOME AND SIT DOWN AND GO 'MAN, I'M BEAT, I'M TIRED,' I'VE GOTTA GO OUT AND SHOP NOW," THAT SORT OF THING. IT MAKES IT INCONVENIENT FOR CUSTOMERS. HOW ABOUT TOBACCO ALLOTMENTS? I KNOW ABOUT THIS. I KNOW ABOUT THIS PERSONALLY. I OWN A LITTLE BIT OF FARMLAND, NOT A GREAT DEAL. BUT WHEN I BOUGHT THAT LAND, I GOT SOMETHING CALLED A TOBACCO ALLOTMENT. AND I GET THIS IN THE MAIL EVERY YEAR. AND BASICALLY WHAT IT SAYS IS, "TOM, YOU'VE GOT A RIGHT TO GROW SOME TOBACCO ON YOUR LAND." DID YOU KNOW THAT YOU CAN'T GROW TOBACCO -- JUST GO OUT HERE ON SOME FARMLAND AND JUST PUT A TOBACCO SEED IN THE GROUND, AND WATER IT AND GIVE IT A LITTLE FERTILIZER, AND KEEP THE SUN ON IT AND SO FORTH? YOU CAN'T DO THAT. THAT'S ILLEGAL. IF YOU WANT TO GROW TOBACCO, YOU NEED AN ALLOTMENT. SO WHEN I BOUGHT THIS LAND, I GOT A TOBACCO ALLOTMENT. THAT GIVES ME THE RIGHT TO GROW TOBACCO. SO DO YOU THINK I GROW TOBACCO? NO. WHAT DO I DO? WELL, I TAKE THOSE ALLOTMENTS AND I RENT 'EM OUT TO SOMEBODY. BECAUSE PEOPLE WHO GROW TOBACCO, THEY MAKE A PROFIT AND THEY CAN'T MAKE THAT PROFIT WITHOUT AN ALLOTMENT. AND I'VE GOT AN ALLOTMENT THAT I DON'T WANT. I'D BE WILLING TO JUST LET IT GO FOR NOTHING BECAUSE I HAVE NO USE FOR IT. BUT I DON'T LET IT GO FOR NOTHING. WHAT I SAY IS, "HEY, YOU WANT TO USE THIS? THAT'LL COST YOU A FEW HUNDRED BUCKS." AND SO EACH YEAR

31 ECO LECTURE ELEVEN 31 I GET A FEW DOLLARS -- OH, A COUPLE HUNDRED BUCKS -- FROM PEOPLE WHO -- TOBACCO FARMERS THAT WANT TO GROW TOBACCO. BUT THEY'VE BEEN TOLD, "YOU CAN'T GET INTO THIS BUSINESS UNLESS YOU HAVE AN ALLOTMENT," SO THEY HAVE TO COME TO PEOPLE WITH THOSE AND RENT 'EM. IS THIS RIGHT? WELL, LET'S THINK ABOUT THIS FOR A SECOND. I DIDN'T EVEN WANT TO GROW TOBACCO. IF THEY SAID "YOU CAN'T RENT THESE; ALL YOU CAN DO IS USE IT YOURSELF," I'D SAY, "OH, LET IT GO." BUT RIGHT NOW I'M GETTING A COUPLE HUNDRED DOLLARS A YEAR OFF OF TOBACCO FARMERS BECAUSE OF THIS GOVERNMENT POLICY TO LIMIT SUPPLY. AND WHY ARE THEY WILLING TO PAY ME? AND THE ANSWER IS: BECAUSE WHEN THEY LIMIT SUPPLY, THE PRICE OF TOBACCO GOES UP. SOME PEOPLE THINK THAT'S KIND OF AN ODD THING, YOU KNOW. OH, TOBACCO COMPANIES AND THE GOVERNMENT'S ALWAYS PASSING A LAW TO SORT OF PUNISH 'EM AND DO THINGS LIKE THAT. AND THEN ALL OF A SUDDEN, YOU START LOOKING AND HERE'S THE GOVERNMENT WITH A LAW THAT RAISES THE PRICE OF TOBACCO PRODUCTS AND MAKES TOBACCO FARMERS BETTER OFF THAN BEFORE. THIS IS A STRANGE LAW. I MEAN, IT'S SORT OF AT WAR WITH OTHER GOVERNMENT LAWS. HERE'S THE NEAT THING -- AND WE'RE GONNA GO ON AND DO A LITTLE BIT MORE OF THIS, BUT THE NEAT THING ABOUT THIS IS SUPPLY AND DEMAND IS NOT TOUGH TO MASTER. YOU CAN GET THIS IN YOUR HEAD. IT WORKS OUT THERE. IF YOU'RE THINKING ABOUT AS A CONSUMER, IT WORKS.

32 ECO LECTURE ELEVEN 32 IF YOU'RE THINKING ABOUT I'M A SUPPLIER AND A BUSINESS, IT WORKS. IF YOU WANT TO UNDERSTAND PUBLIC POLICY, YOU CAN USE IT FOR THAT. TODAY THE PRICE OF OIL IS LOW. LET'S THINK ABOUT THAT. AND I WON'T EVEN GO IN TO DRAWING THE CURVE, BUT TODAY THE PRICE OF OIL IS LOW. WHY IS THAT? TWO REASONS. ONE IS, A LOT OF COUNTRIES ARE HAVING RECESSIONS RIGHT NOW. AND THOSE COUNTRIES THAT ARE HAVING RECESSIONS, THEY CAN'T AFFORD OIL SO THE DEMAND IS DOWN. THEIR BUSINESSES ARE SHUT DOWN SO THEY DON'T HAVE AN INDUSTRIAL DEMAND. LOW DEMAND FOR OIL SO THAT PUSHES THE PRICE DOWN. BUT THERE'S SOMETHING ELSE THAT'S BEEN TAKING PLACE, REALLY FOR SEVERAL YEARS. TECHNOLOGY'S IMPROVED, TECHNOLOGY ON FINDING OIL. YOU KNOW, USED TO BE WHAT WOULD HAPPEN IS, WE WOULD STICK A PIPE IN THE GROUND AND PUMP THE OIL OUT. AND THEN WHEN IT WOULD PLAY OUT -- MAYBE ONE, TWO, FIVE, TEN, TWENTY YEARS, WHEN IT WOULD PLAY OUT -- JUST ABANDON THAT AND GO ELSEWHERE. WE'VE SUCKED ALL THE OIL OUT OF THE GROUND RIGHT THERE. WELL, NOW WE HAVE NEW TECHNOLOGY AND WE COME BACK IN THOSE OLD OIL FIELDS THAT WE THINK ARE PLAYED OUT. WE CAN STICK A NEW PIPE DOWN IN THE GROUND -- THESE PIPES CAN TURN THE CORNER. AND THEY KIND OF SNIFF, YOU KNOW. AND I MEAN NOT SNIFF LIKE A DOG, BUT KIND OF -- BUT THEY'RE DOING IT WITH COMPUTERS. THEY COME ALONG HERE AND THEY GO, "OH, MAN. I THINK I'M SMELLING SOME OIL." AND THEY GO FOR THAT OIL AND THEY PUMP THAT OUT OF THE GROUND. AND IF THEY DON'T FIND IT, THESE NEW PIPES

33 ECO LECTURE ELEVEN 33 CAN BACK UP AND THEN GO ANOTHER DIRECTION UNTIL THEY FIND OIL. AND SO WHAT HAPPENS IS, THESE OIL FIELDS THAT WE THOUGHT THOSE WERE PLAYED OUT, THOSE OIL FIELDS NOW THEY BELIEVE THEY'LL BE ABLE TO GET JUST AS MUCH OIL OUT OF A PLAYED OUT FIELD AS WAS ORIGINALLY RECOVERED FROM THAT FIELD WHEN IT WAS BRAND NEW. AND SO TECHNOLOGY IS COMING ALONG, GIVING US AN INCREASE IN SUPPLY OF OIL. I'M SAYING THERE'S A RECESSION THAT'S REDUCING THE DEMAND WHILE AN INCREASE IN SUPPLY AND A REDUCED DEMAND, THAT PUSHES THE PRICE DOWN. NOW, THAT RECESSION IN THESE OTHER COUNTRIES, THAT'LL GO AWAY. EVENTUALLY THEY WON'T BE IN RECESSION AND DEMAND FOR OIL WILL GO BACK UP. BUT THIS NEW TECHNOLOGY OF GOING DOWN AND SNAKING AROUND AND SNIFFING FOR THAT OIL, THAT'S NOT GOING AWAY. PEOPLE KNOW HOW TO DO THAT NOW. THEY'RE NOT GONNA FORGET. SO THE SUPPLY OF OIL -- THE SUPPLY TO US, NOT THE UNDERGROUND SUPPLY -- THE SUPPLY OF OIL HAS INCREASED. AND SO WE WILL HAVE DEPRESSED OIL PRICES AS A RESULT OF THIS NEW TECHNOLOGY FOR MANY, MANY YEARS. LET ME SPEND THE LAST COUPLE OF MINUTES JUST SHOWING YOU ONE SIMPLE IDEA. BUT EVEN THOUGH IT'S SIMPLE, IT'S WORTH THINKING ABOUT. LET'S DRAW OUR SUPPLY AND DEMAND CURVE AGAIN, SUPPLY AND DEMAND. YOU KNOW, WHAT I'VE DONE UNTIL NOW, EVERY SINGLE TIME. i'm NOT GONNA DO IT THIS TIME, BUT EVERY SINGLE TIME I DO SOMETHING LIKE START WITH THE PRICE, P1, AND THEN COME OVER TO THE DEMAND CURVE

34 ECO LECTURE ELEVEN 34 AND SAY, "HERE'S THE QUANTITY." WELL, WE STARTED HERE AND WE WENT DOWN TO THERE. HERE'S THE QUANTITY SUPPLIED. AND I'D START AT THE PRICE AND GO DOWN TO THE QUANTITY. I WANT TO DO THE OPPOSITE NOW FOR JUST A SECOND. LET'S DRAW OUR SUPPLY AND DEMAND DIAGRAM AND LET'S TALK ABOUT -- STARTING ON THE HORIZONTAL AXIS DOWN HERE, LET'S TALK ABOUT THIS ONE UNIT, FIRST UNIT OF GOOD X. I'M STARTING AT THE BOTTOM NOW. I WANT TO GO UP. AND THEN OVER AND SAY -- LET'S SAY THIS IS A PRICE OF SIX DOLLARS. HERE'S THE INTERPRETATION. THERE IS SOME CONSUMER OUT THERE WHO VALUES THAT FIRST UNIT BY AS MUCH AS SIX DOLLARS, WOULD BE WILLING TO PAY UP TO SIX DOLLARS FOR THAT FIRST UNIT. IF WE GO UP TO THE SUPPLY CURVE, WHAT THIS SAYS IS, THERE IS SOME SUPPLIER OUT THERE WHO'S WILLING TO SUPPLY THIS UNIT FOR AS LITTLE AS TWO DOLLARS. AND SO FOR THE FIRST UNIT, THERE'S A GAIN FOR SOCIETY -- SOMEBODY VALUES THAT UNIT AS MUCH AS SIX DOLLARS. SOMEBODY ELSE IS WILLING TO LET IT GO FOR TWO. THERE'S A GAIN FOR SOCIETY IN THIS TRANSACTION FOR THE FIRST UNIT. THERE'S SOMEBODY THAT BENEFITS FOUR DOLLARS. IT MAY BE THE SUPPLIER GAINS. MAYBE THE SUPPLIER GETS TO SELL IT FOR SIX DOLLARS, AND WOULD'VE SOLD IT FOR TWO, AND GETS THE GAIN OF FOUR. IT MIGHT BE THAT THE UNIT SELLS FOR TWO AND THE CUSTOMER WOULD'VE BEEN WILLING TO PAY SIX, AND COMES OUT FOUR DOLLARS AHEAD. MAYBE THEY SPLIT THE DIFFERENCE. BUT THE POINT IS, THERE IS A GAIN. THIS IS SOMETHING CALLED

35 ECO LECTURE ELEVEN 35 CONSUMER SURPLUS. AND LET'S COME OVER TO HERE, ALL THE WAY OUT TO EQUILIBRIUM THAT'S TRUE. THE SECOND UNIT, THIRD UNIT, FOURTH UNIT, FIFTH UNIT, ALL OF THOSE UNITS ARE MORE VALUABLE TO THE CONSUMER THAN THEY ARE TO THE SUPPLIER. THE THIRD AND THE FOURTH -- EACH ONE OF THESE. AND THEN WE STOP RIGHT THERE. WE NEVER GO PAST THAT POINT. WE NEVER GET OUT HERE WHERE THE CONSUMER SAYS, "GEE, THAT UNIT'S ONLY WORTH FOUR DOLLARS TO ME," AND THE SUPPLIER SAYS, "WELL, I'D HAVE TO HAVE EIGHT TO GET IT." WE NEVER GET TO THAT POINT. SO WITH EVERY ONE OF THESE UNITS THAT DO TRADE, OUT TO THE EQUILIBRIUM, I'M SAYING THAT THERE'S THIS CONSUMER SURPLUS THAT GETS PRODUCED. IT'S A GAIN FOR SOCIETY. AND SO WHAT I'M TELLING YOU IS THE MARKET ECONOMY IS CREATING WEALTH FOR US BY -- WE CAN BUY THINGS THAT WE OTHERWISE WOULD NOT HAVE AVAILABLE. WE CAN BUY THOSE THINGS AT A BARGAIN, LESS THAN WE'RE WILLING TO PAY. I THINK WE'RE GONNA END SUPPLY AND DEMAND, OUR DISCUSSION RIGHT THERE, AND I'LL SEE YOU NEXT TIME.