You might find it interesting to ponder the implications of the sign in a Venezuelan shopping mall which I saw on Harvard’s N. Gregory Mankiw’s blog. Called Mercado Bicentenario, the store was a part of a chain that had recently been nationalized by the Venezuelan government. The sign said the following:
Description of the product: Diana oil
Fair Price: 4,73 Bfs
Capitalist Price: 7,00 Bfs.
% of Savings: 32%
The Economic Lesson
Please consider for a moment what you think when you hear that a t-shirt is $10. What if the price is $50? As market determined prices, $10 and $50 convey a message to sellers and buyers.
Market (or as stated in Venezuela, “capitalist”) prices provide crucial information. They tell us about value and efficiency and affordability. They let consumers and businesses and government decide what to do, what not to do, and what they can do better.
A government established price conveys no signals to sellers and buyers. The supply side can no longer determine a connection among price, profits, and using resources efficiently. On the demand side, consumers can neither assess quality nor indicate what they want and do not want.
The long lines, pajama tops without buttons, and grouchy salespeople that characterized the former Soviet Union are perfect examples of what happens in a centrally controlled economy.