Price Controls – Chavez Style
Morris Coats’ brother pointed out this article in a comment to his Corn Law post, but it really is worthy of its own post.
Read the article here. The basic story is that Venezuela imposed price ceilings on a number of goods a few years ago. They are going through a rough patch now.
As you know (or soon will know), the textbook treatment of price ceilings shows that binding price ceilings cause shortages. First, the lower prices cause consumers to wish to purchase more of the good. Second, the lower prices cause producers to wish to produce less of the good. Together, this causes a shortage. Normally, with a shortage (when prices are free to adjust), this would cause upward pressure on prices. However, with the law in place, prices are not free to adjust upward.
Some sugar vendors are refusing to sell at such low prices. Further, when we discuss price ceilings in class, we claim that people respond by trying to evade the regulations (charging prices higher than legally allowed). Can you spot any establishments trying to do this?
What makes the situation ever more exasperating in Venezuela is that the inflation rate is quite high, roughly 15% a year. For comparison’s sake, the inflation rate is roughly 3% a year in the United States.
Say, for instance, the price ceiling price of beef is $4.00 / pound, while the free market price for beef would be $5.00 / pound. At this price, there will indeed be a shortage. Now suppose, during the course of the next year, all prices increase by 15%. Thus, the free market price of beef would increase to $5.75. If the price ceiling price is not adjusted from $4.00, the price ceiling is “more binding” and will lead to a larger shortage.
The funny part, but unfortunately not surprising, is that government officials are blaming “unscrupulous speculators” for the shortages. We know why there are shortages, see above. Nonetheless, speculators make money by buying the goods when prices are “low” and selling goods when prices are “high”. Now, why oh why are prices low?
–CT
By the way, while not in the article, the government imposed minimum wage laws recently as well. Assuming the minimum wages are not indexed to inflation, will rapid inflation lead to the minimum wage law becoming more binding or less binding?
