Price controls and markets

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JohnRoberts

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I have been watching reports from Venezuela as the people deal with a broken economy. Strict government price controls have led to long lines and empty store shelves as there is no supply at the artificially low price.

Any here old enough should remember when our government attempted price controls to manage increasing gasoline prices.  Odd-even day gas station access (based on license plate numbers), and long lines at gasoline stations for scarce supply was the result. Magically when the price controls were lifted the supply was adequate and the lines evaporated like a bad memory.

In Venezuela the military is tasked with protecting food convoys as they make re-supply runs to food stores. Food riots result in looting of stores after they get fresh re-supply.

The government experimented with short term open borders with neighboring countries so residents can cross to buy food in the other country that doesn't have price controls. A more recent experiment is to lift price controls in some test areas of Venezuela.  Just like the US experience with gasoline lines, the supply magically appeared, lines disappeared and food looting/riots stopped. The bad news is that some staples suffered price increases of 10x to 20x.

Venezuela was already suffering from high inflation, so this will definitely add pressure to that inflation.  In a true free market the high prices would stimulate investment into manufacturing (or farming, or whatever) to bring more supply of goods to market.

Since Venezuela in the midst of recall election effort, it is unclear where this will go, but it is remarkable to see in Venezuela since the law mandating price controls is still in place so this free market experiment is illegal. In the short term it is in the government's interest to quell food riots.

We rarely see un-conflicted macro economic experiments but the cause and effect (actually price sensitivity to supply-demand curves) looks pretty clear here. I somehow doubt they will let it run it's full course all the way to increased supply and lower prices.

JR 

PS: We only need to observe the modern price of oil to see the market gyrations around price/investment where too-high prices (peaking close to $150 barrel) led to over investment in drilling new wells, that led to over supply and oil prices crashing down into a $30 barrel range. This low price made many new wells uneconomic to pursue. Prices have slowly recovered to $50 as supply falls off and demand increases. This $50 price has saved some marginal drillers (not all), but expensive oil (like Canadian tar sands) are still hurting.  This oil market price is not a pure economic experiment since OPEC cartel has a fat thumb on the scale trying to manage the supply side of the equation (lots of moving parts inside OPEC as Saidi, Iran, and Russia are all energy exporters) . OPEC didn't try to defend the $30 price hoping to drive marginal drillers out of business, but an already drilled well is a sunk cost (bad pun) so many keep pumping for any revenue.
 

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