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Examples of shortages caused by price controls

Economic theory predicts that if a government imposes a ceiling for the sales price of any good or service, usually set below the market price that would result from the interaction of competing suppliers and demanders, there will be shortages of goods because less sellers will be willing to sell at the lower price, while more buyers will try to buy at that lower price. The excess demand not being met by existing supply can be counted as the shortage quantity.

Today's Venezuela has become a textbook example of this Microeconomics axiom. A while ago at the supermarket I was unable to find any sugar or eggs. There is still some coffee on the shelves, but exogenous factors such as the lack of sufficient rain during 2009 and the unseasonably high producer cost of Colombian coffee beans, are only accelerating the alarm. Venezuela, the world's leading coffee exporter during the 19th century, will soon be importing coffee for domestic consumption.

There is a long list of items whose sales price is regulated by the government, often below manufacturer's input costs. Besides coffee, eggs, and sugar, the regulation mandates a maximum sales price for raw milk, powder milk, chicken, meat, rice, pork, corn and wheat flour, toilet paper and several other items. Most of the aforementioned goods have been on and off the shelves for extended periods of time, and the government has tried to solve the situation through urgent, isolated one-time operatives consisting of state-managed imports to be sold at a huge loss for taxpayers and for the state oil company. These imported goods are often of lower quality and even rotten at times. Such imports are often carried by ocean on containers from their source country without strictly following the usual procedure standards internationally set for such transportation. They are sold to the public later on, in non-hygienic conditions at state-owned stores. Customers there must spend hours waiting in queues to be serviced.  

Many retail stores have been forced to close for a few days for attempting to sell domestically-produced goods above the regulation price. These retail stores claim that if they comply with the regulations they would be forced to sell at a loss. Many food processing factories are on their way of becoming nationalized, on the accusation of hoarding, as they refuse to sell their products to wholesalers below their input costs. This has resulted in many suppliers closing down production altogether and transfering it to neighboring countries. As a result, Venezuela's industrial capacity has shrunk by a significant percentage whose quantitative estimation widely varies among various sources. As capacity becomes structurally reduced, the classic textbook leftward shift of the aggregate supply curve for the Venezuelan economy takes place. This results in even less quantity supplied at a higher price, assuming aggregate demand is fixed. However, aggregate demand actually shifts simultaneously to the right (but perhaps to a lesser extent than the aggregate supply curve's leftward shift) due to extensive government transfer payments and due to the natural population rate of increase. The end result is one of the world's highest rates of inflation (though not as much as Zimbabwe's) in the twenty-first century so far.

It is in this context that those of us who still believe in our country's potential must deal on a daily basis to create and improve business conditions.

Rivero & Cooper, Inc.                  rroopstr