Venezuela Revisited

Supermarket Queue in VenezuelaThis story would be funny if there wasn’t so much human misery involved.  Venezuela has been dealing with true shortages for several years.  I’ve written about this before (including the above photo).  Contrary to the story told by the media, Venezuela’s problems are not caused by low oil prices.  Low prices do not cause persistent shortages.  The only cause of a long-term persistent shortage is a price ceiling that sets the maximum legal price below the equilibrium price.  That creates excess demand and a need for non-price rationing.

One side effect of price controls is black markets.  Price-controlled goods are sold illegally, often at prices higher than the equilibrium price would be.  To counter this Venezuela has kept its borders closed.  Yesterday (July 16) the government opened the border with Colombia for eight short hours.  In that time an estimated 35,000 Venezuelans crossed into Colombia to buy things not available in their country.  These are not luxuries in most cases.  Food and medicines are two of the most-sought-after products.

In other news, Venezuelan President Maduro has put the military in charge of the food distribution system to ensure that the price controls are enforced.  The unspoken (but obvious) reason for this is to make sure the military is well-fed.  Citizens will get anything that is left.  Oh, yes, it’s easy to predict that a few members of the military will resell some of their purchases on the black market.

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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.