The Vagaries of Price Controls

It comes as no surprise that, in response to skyrocketing inflation and a stagnant economy, President Hugo Chavez has Venezuela has responded with a series of sweeping price controls, threatening to arrest any who violate them and seize their businesses. After all, he is a socialist. What Mr. Chavez, and other socialists believe, is that price controls will simply stop evil corporations from raising the good of a given product higher than is “moral” or “just”. No harm, no foul, everyone gets what they want. Except those evil rich, of course.

The actual effects are much different. What price controls actually do is create a situation in which the price of a given good is below the equilibrium (it is possible that a price roof could be set above the equilibrium level for a good, but it would be irrelevant if this was the case, and have no effect on the buying or selling of that good). The sympton of this is that there are more people willing to buy the good in question than suppliers are willing to supply. The effect is age old and familiar, and is of course occurring in Venezuela right now: Shortages. Unlike in a free-price atmosphere, where some people, dealing with accurate price-data, would decide that the sum of money equal to the price of a given good was worth more to them than the good in question, government intervention keeps price data inaccurate. Markets are not allowed to clear as they do in a non-interventionist atmosphere, and we are faced with little more than a race among consumers to get to the supplier first. This policy led, in large part, to the oil crisis of the 1970s, and the all-too familiar queues for gas of that era. In Venezuela, they are creating shortages in perhaps the most necessary good of all: Food.

Besides simply creating shortages, these price controls actually unfairly benefit the wealthy, not the poor, as they are intended to. Firstly, because at the newly lower prices, wealthy consumers are much more likely to buy in great bulk, and because, should wealthy consumers be unable to satisfy their desires on price-controlled markets, they can afford to go to black markets. Rarely is this the case with the poor. Those not wealthy enough to buy in huge bulk, or access black markets for their goods, are thus left hung out to dry, their only hope to access goods (here, food) being getting there before anyone else. The nature of shortage-created queues makes this as well extremely unlikely.

Price controls are meant to punish the rich and benefit the poor, and undoubtedly that is Mr. Chavez’ intention here. What they do is punish is all, the poor more than the wealthy.