Venezuela Reminds Us Again Why Price Controls Don’t Work

image_pdfSave to pdf fileimage_printPrint

Supermarket Queue in Venezuela

In a front-page story in today’s Wall Street Journal (February 28, 2014, p. A1) Venezuela reminds us again why price controls don’t work.  The image below (from the same article) shows a very long queue waiting to get into a supermarket.  Those at the end of the line will get nothing.

Scarce goods and services (pretty much anything with a price) must be rationed somehow.  Letting the price of a good adjust takes care of the problem automatically.  If the price is below equilibrium, quantity demanded will exceed quantity supplied.  The price will rise until the two quantities are equal.

If the price is above equilibrium, quantity supplied will exceed quantity demanded.  This surplus will cause sellers to reduce the price to get rid of the excess supply.  Once again, the market moves toward equilibrium.

If a price ceiling is imposed that is below the equilibrium price, some other rationing mechanism(s) must come into existence.  The most common is queuing.  People at the front of the line can buy as much as they want at the low prices.  People at the end of the line get nothing.

Is price rationing fair?  I have no idea.  But I do know that queuing is a bad substitute.  The people at the front of the line will be those who place a low value on their time: the unemployed, the elderly, and children.  The folks bringing up the rear will be those who place a high value on their time: those with jobs, parents trying to care for their children, and others similarly situated.  The real question is whether this system is more or less fair than price rationing?

Postscript: another technique used for non-price rationing is black markets.  Many goods will be available in the underground economy.  The price there will usually be far greater than the equilibrium price.  There are two reasons for this.  First, there is significant additional risk to operating illegally.  That risk must be compensated with a higher price.  Second, those who buy in the underground economy usually have demand curves that are not very sensitive to price.  Less elastic demand means  higher prices.

Share if you feel like it

About Tony Lima

Retired after teaching economics at California State Univ., East Bay (Hayward, CA). Ph.D., economics, Stanford. Also taught MBA finance at the California University of Management and Technology. Occasionally take on a consulting project if it's interesting. Other interests include wine and technology.