Price Floors: Wasteful Quality and Resource Misallocation (Airline Regulation)

Review of Previous Price Floor Effects: The video builds upon prior discussions, reiterating that price floors lead to surpluses and lost gains from trade. This final video introduces two additional effects: wasteful increases in quality and misallocation of resources.

Example: Airline Regulation by the Civil Aeronautics Board (CAB):

• Period of Regulation: From 1938 to 1978, the CAB regulated airlines in the United States.

• Restrictions: CAB regulations imposed significant barriers to entry for new competitors and maintained airfares considerably above market levels.

• Evidence of High Fares: Economists found that fares for unregulated intra-state routes (e.g., Los Angeles to San Francisco) were about half the price of equal-distance inter-state flights, which were regulated by the CAB. This suggested the CAB maintained prices at approximately 2 times market rates.

• Regulatory Capture: The CAB is cited as a classic example of a regulatory agency that was