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♪ [music] ♪

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- [Tyler] In the next two videos,

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we'll turn our attention 
to price floors and their effects.

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In this video, we'll look at 
the first two effects

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and cover one of the most 
well-known price floors:

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the minimum wage.

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Let's get started.

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A price floor is a minimum price 
allowed by law.

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That is, it is a price 
below which it is illegal

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to buy or sell --

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called a price floor 
because you cannot go below the floor.

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We're going to show 
that price floors create

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four significant effects:

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surpluses, lost gains from trade, 
wasteful increases in quality,

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and a misallocation of resources.

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We're going to go through 
these each in turn.

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Before we do so, however, 
it's worthwhile asking this question:

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price floors are less common 
than price ceilings --

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why is this?

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That is it's more common 
to see a price being held

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below the market price,

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than it is to see a price 
being held above the market price.

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Why?

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One reason may be political.

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That is, there are typically
more buyers of goods

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than there are sellers of goods.

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So when you hold a price 
below the market price,

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you may benefit, or at least 
appear to benefit,

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more buyers,
more people, more voters

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than when you hold a price 
above the market price,

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which would appear to harm buyers.

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Now interestingly, the paradigmatic,

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the classic case of a price floor

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is the exception
which proves the rule.

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Because the classic case 
of a price floor is a good

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for which there are more sellers 
than there are buyers.

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So here's the case where the price 
is kept above the market price,

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and it make sense politically 
because there are lots of sellers

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compared to buyers.

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So, what is this good, 
for which price floor is common,

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and for which sellers exceed buyers?

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We'll get to that in just a moment.

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Think about it.

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So one of the things 
which a price floor does

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is it creates surpluses.

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Okay. Now, have you thought
of the good

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which a price floor is common,

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and it's a good for which 
the number of suppliers

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exceeds the number of buyers?

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Well, the minimum wage 
is a price floor.

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The minimum wage is a price 
below which you cannot sell labor,

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and the suppliers of labor 
exceed the buyers of labor.

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So it's not surprising
that a minimum wage

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is often politically successful.

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Now, who will the minimum wage affect?

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Workers with very high productivity 
who are already earning

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more than the minimum wage –

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they are not going to be affected 
by the minimum wage perhaps at all.

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Instead, it will affect 
the least experienced,

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least educated, least trained workers.

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Low-skilled teenagers, for example, 
are most likely to be affected

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by the minimum wage.

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Now, I said that a price floor
creates surpluses.

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The minimum wage is a price floor,

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so it's going to create a surplus.

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A surplus of labor we call what?

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We say a gaggle of geese?

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Say pride of lions?

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A surplus of labor
is called unemployment.

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So let's look with our model

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to understand how a minimum wage
can create unemployment,

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particularly among the least skilled workers.

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Okay. Here's our standard diagram,

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except we're going to put 
the quantity of labor,

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especially unskilled labor, 
on the horizontal axis.

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The wage or the price of labor 
on the vertical axis.

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That's our supply curve.

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That's our demand curve with the market wage 
and the market employment level.

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Now we're going to add the minimum wage.

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This is a price floor below which

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it is illegal to buy 
or sell this good, labor.

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Now, we just read the consequences 
of the price floor of the diagram.

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So we read, for example,

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that at the minimum wage, 
the quantity of labor demanded

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is read off the demand curve.

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Remember, this is the demand for labor.

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So, this is the quantity of labor demanded,

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and at the minimum wage, 
the quantity of labor supplied

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is read off the supply curve.

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Let's put that point on, that's Qs.

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So we have Qs units of labor supplied,

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Qd units of labor demanded.

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Qs is bigger than Qd,

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so, the difference between them 
is a surplus of labor,

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also known as unemployment.

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Now the minimum wage is a controversy 
and hotly debated issue.

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Some academic results indicate

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that the unemployment effect 
of a modest increase in the minimum wage

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would not be substantial.

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At the same time, however, 
we also have to recognize

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that a modest increase in the minimum wage 
would not have big benefits either.

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First, only a small percentage of workers

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are going to be affected by the minimum wage.

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97% or so of workers already earn 
more than the minimum wage.

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In fact, even among young workers,

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94% or so less than 25 years of age,

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they already earn more than the minimum wage.

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At best, the minimum wage 
will raise the wages

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of some low-skilled and young workers,

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most of whose wages 
would have increased anyway

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as they became more skilled.

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At worst, the minimum wage will increase 
the price of a hamburger,

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create some unemployment

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and/or keep some teenagers 
in school for a bit longer.

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Not all necessarily bad things.

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What, however, about a larger increase 
in the minimum wage?

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Few economists doubt

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that a large increase in the minimum wage

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would cause serious unemployment.

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After all, we could not create prosperity

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by raising the minimum wage 
higher and higher.

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If a minimum wage of 10 dollars 
an hour is a good idea, what about 15?

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What about 20? 25?

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A hundred dollars?

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500 dollars an hour?

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Would we all be rich at that point?

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Would we all be receiving wages 
of 500 dollars an hour?

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Of course not.

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Most of us would be unemployed.

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So a large increase in the minimum wage

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is going to cause serious Unemployment,

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and the good example of this 
is Puerto Rico in 1938.

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Congress actually set 
the first minimum wage at this time

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at 25 cents an hour.

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Now, that may seem Low,

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but that's at the time when the average wage 
in the United States

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was still less than a dollar an hour,

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was 62 and a half cents an hour.

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Congress, however, forgot to exempt Puerto Rico.

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When the average wages 
in Puerto Rico at that time

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were much lower than in the rest 
of the United States,

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only three cents to four cents an hour.

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So this modest increase 
in the minimum wage

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for the continental United States

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was a huge increase in the minimum wage for Puerto Rico.

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And lots of Puerto Rican firms went Bankrupt,

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it created devastating unemployment.

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In fact, Puerto Rican politicians 
came to Washington

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to beg for an exemption 
to get them out of the minimum wage.

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So, a large increase in the minimum wage

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would certainly cause substantial 
and serious unemployment.

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We do see higher minimum wages 
in other countries.

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The minimum wage in France 
is higher than the U.S.

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relative to average wages 
in those two countries.

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In addition, labor laws in France

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make it very difficult to fire workers

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once they have been hired.

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As a result, firms in France 
are very reluctant to hire new workers.

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Younger workers are especially affected
because they are less productive

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and also they are less known commodities.

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So, the risk of hiring them is greater.

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As a result, unemployment among young workers
is very high in France.

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It was 23% in 2005, and that was long before 
at the economic crisis,

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the financial crisis 
affecting the entire world.

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So even during good times,

unemployment in France 
among young workers is very high

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because the minimum wage is high,

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and because firms don't want to hire,

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given how difficult it is 
to fire workers.

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Okay. Let's also show that the minimum wage 
creates lost gains from trade –

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this ought to be fairly familiar by now.

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At the minimum wage, 
the quantity of labor demanded

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is given by Qd.

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That is less than the quantity 
of labor which would be traded

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given the market wage,

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this market employment.

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Key point is that 
there are buyers of labor

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who are willing to buy labor 
at a price below the minimum wage,

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and there are suppliers of labor,

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workers who are willing 
to work below the minimum wage.

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These deals would be mutually profitable,
but they are illegal.

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So, there are buyers of labor

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who are willing to buy below 
the minimum wage,

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there are sellers willing to sell.

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These deals would be mutually profitable, 
but they are illegal, they are not made.

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Because of that, there are lost
gains from trade or a deadweight loss.

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Okay. So, we have covered 
the first two effects of price floors,

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namely surpluses 
and lost grains from trade.

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In the next lecture, we will use 
a slightly different example

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to look at wasteful increases in quality 
and a misallocation of resources.

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- [Announcer] If you want to test yourself,

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click Practice Questions.

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Or, if you're ready to move on, 
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