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 entry was edited after it was first posted.