Tag Archives: price controls

05.23.2013 | Price Ceilings: Venezuelan Toilet Paper Shortages

One shopper had to search for toilet paper in 6 stores. Another arrived in a supermarket just after a delivery but was limited to a 4-roll maximum. Attempting to deal with its toilet paper shortage, the Venezuelan government has said it would import 50 million rolls. Because the country’s monthly demand for toilet paper is 125 million rolls, I wonder if 50 million is enough.

In addition…

Venezuela’s Central Bank Scarcity Index indicates that shortages of other items like cooking oil, sugar and cornflour are worsening. Just above 21%, the scarcity index tells us that for every 100 goods, 21 are not available in markets. Correspondingly, with an annual inflation rate close to 30%, purchasing power is sinking.

Venezuela's Scarcity Index from the Atlantic

So where are they? Venezuela’s President Maduro continues to cope with the perverse incentives that are the legacy of his deceased predecessor, Hugo Chavez. Even the recent increase in capped prices by 20% for several basics like milk, cheese, butter and beef had little impact. The gap remains between quantity demanded and quantity supplied.

Even with a 20% increase in prices, if the ceiling is below equilibrium, shortages result.

Our bottom line? Price ceilings lead to immense dysfunction:

Too much quantity demanded.
Not enough quantity supplied.
Huge transaction costs spent when people waste time searching store after store.
Inadequate resources allocated to developing oil wealth.
Factories operating way below capacity.

Sources and Resources: There are so many articles about the toilet paper shortages in Venezuela. Reuters, the BBC, Bloomberg all had something to say while my Scarcity Index is from The Atlantic.

Posted by: adminEcon
Tags: demand and supply, incentives, price ceilings, price controls, shortages, Venezuela
Comments (0) Add a Comment

11.30.2012 | Do You Like Rent Control?

Asked if it makes sense to mandate lower rents for some apartments in large cities, many of us say yes. Lower rents facilitate diversity and they enable middle income municipal workers to live close to home. Affordability is good. Yes?

The residents of Cambridge, Massachusetts displayed their support for rent control when they voted to continue it in 1995. However, because the rent control mandate lost in a statewide referendum, Cambridge residents were defeated.

Maybe, though, they really won.

Looking closely at the impact of capping apartment rents on all properties built before 1969 in Cambridge, 2 researchers uncovered a steep downside. Reducing rents 25% to 40% lower than nearby apartments made the value of all housing– controlled and non-controlled–decline. In addition, for rent controlled properties, the peeling paint and loose railings were examples of generally poor upkeep. And, as all econ books remind us, rent ceilings create shortages because, at a lower price, more quantity is demanded than the amount supplied.

After 1995, when the controls were lifted, assessed values rose. For previously controlled properties, they went up approximately 20%. For non-controlled buildings, the increase was even more. Totally, the amount values rose from 1994 to 2004 because rent control ended was estimated as close to $1.8 billion.

Our bottom line: The connection might seem distant but let’s return to a previous post on price gouging. Both rent control and anti-price gouging laws sound like attractive public policies with considerable voter appeal. However, both have negative externalities– a harmful impact experienced by an uninvolved third party–that represent the hidden cost we all pay.

A final fact: There are approximately 1 million rent controlled units in NYC.

Sources and resources: Thanks to Timothy Taylor for the Conversable Economist post that explains the impact of rent control in Cambridge, MA and for his link to the original study. If you want to read more about rent control, here is the story of a challenge in NYC that involved the Supreme Court. For anti-price gouging laws, here is what NJ Governor Christie is enforcing and here is a criticism.

Posted by: adminEcon
Tags: anti price gouging laws, apartment rents, Cambridge, cost benefit, Governor Christie, Harmon v. Kimmel, landlords, Massachusetts, negative externalities, NJ, NYC, politics v economics, price ceilings, price controls, price gouging, shortages, Supreme Court
Comments (0) Add a Comment

04.22.2012 | Venezuela’s Price Controls

Reading that a Venezuelan retiree did not mind the food lines, I started thinking about how President Chavez’s price controls have changed incentives. The retiree, who has more time than money, now has the incentive to stand in line. Meanwhile, a business owner, seeing profits erased by price controls has the incentive to produce less.
When a ceiling on prices increases the quantity that people demand while decreasing the quantity that producers supply, the result is Venezuelan shortages of the basics like powdered milk, beef, chicken, vegetable oil and sugar.

The bottom line: A government established price creates distorted incentives for buyers and sellers. The long lines, pajama tops without buttons, and grouchy salespeople that characterized the former Soviet Union are perfect examples of the results of distorted incentives.

This NY Times article tells more about price controls in Venezuela. Also, you might enjoy seeing this sign from a Venezuelan store that is posted here.

*This entry was edited after it was first posted.

Posted by: adminEcon
Tags: incentives, inflation, price controls, prices, shortages, Venezuela
Comments (0) Add a Comment

07.20.2011 | Venezuela’s Economic Problems

Venezuela has 2 basic economic problems:

The law of supply: Because price and quantity move in the same direction, if price goes down, then producers provide less. This takes us to Venezuela’s 27.1% inflation rate. President Hugo Chavez responded by controlling the prices of many consumer goods and services. One result? Importers pay the soaring world price for corn, they receive the Venezuelan government’s controlled price for corn oil, and supermarkets have shortages.
The law of demand: Because price and quantity have an inverse relationship, consumers want to buy more when price goes down. Here, Marketwatch tells us that government subsidized gas prices are so low in Venezuela that President Chavez chastised Venezuelans for excessive driving. At $.12 a gallon, it costs $2.40 to fill a 20-gallon tank! Complementary products? Venezuela had unusually high Hummer sales.

So, when, Transparency.org says that Venezuela ranks near the bottom on world corruption scores and the Index of Economic Freedom indicates business activity is limited by multiple government constraints, the results can be explained by supply and demand.

The Economic Lesson

This takes us to the three basic economic questions that every country needs to answer:

What will be produced?
How will goods and services be produced?
Who will receive income?

When government distorts supply and demand decisions by controlling prices, it changes the answers to the 3 economic questions.

An Economic Question: How could price controls change the answers to the 3 economic questions?

Posted by: adminEcon
Tags: 3 basic economic questions, Hugo Chavez, law of demand, law of supply, price controls, Venezuela
Comments (0) Add a Comment

06.21.2011 | Israeli Cottage Cheese Boycott

News articles say that the Israelis are “cheesed off” and “curdled.” Angered by the soaring price of cottage cheese, a Facebook consumer group of 70,000 friends has agreed to stop buying it on July 1. The headline on the boycott page said, “Let it stay in the stores and spoil until the price comes down.”

This “tempest in a tub” began when cottage cheese price caps were removed. You can guess the result. The price of a 250 gram (9 ounce) container soared from 4.82 to 8 shekels ($2.30). A national breakfast staple, Israeli cottage cheese (just like Coca-Cola) has a secret small curd formula.

The Israeli Facebook group appears to want a cottage cheese price cap.

The Economics Lesson

During the early 1970s, to control inflation, U.S. President Richard Nixon implemented wage and price controls. Like taking the cover off a pressure cooker, when the controls were lifted, prices immediately jumped.

As economists, we can explain why with a demand and supply graph. With the demand curve sloping downward, the supply curve sloping upward, the Y-axis price and the X-axis quantity, the curves meet at an equilibrium price and quantity. The market pushes toward equilibrium. Above equilibrium? There is a surplus. Below equilibrium? There is a shortage.

An Economic Question: Why are price controls called a ceiling?

Posted by: adminEcon
Tags: ceiling, cottage cheese, demand, Israel, price controls, supply
Comments (0) Add a Comment