Price Floors: Airline Fares

In this video, we cover how price floors lead to wasteful increases in quality and a misallocation of resources. Using the real-world example of airline regulations from 1938-1978, we show how price floors can be used to restrict entry and reduce competition within an industry. When the Civil Aeronautics Board regulated airline fares, airlines couldn’t compete on price so they instead had to compete by increasing quality. This may sound like a good thing, but we’ll show how this actually created quality waste since the cost of that quality was higher than the value to the customers. Price floors also lead to the misallocation of resources by preventing competition and responsiveness to consumer demand. In this video, we’ll show you how consumers are negatively affected by price floors.

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00:00 Price floors
00:41 Wasteful increases in quality – airline fares example
02:18 Wasteful increases in quality – model
05:30 Deregulation results
06:57 Misallocation of resources
07:37 Recap