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?