Saturday, February 20, 2010

Hungry??? What does that have to do with the price of Beef in Argentina???

The Wall Street Journal has an excellent example of government intervention in the economy that produces results consistent with economic theory---shortages that lead to high prices...Argentina implement price AND export controls on beef in an effort to (1) keep prices low domestically and (2) to keep meat in Argentina instead of selling on the international market. 
"Economists blame the price spiral on chronic overspending by the government of President Cristina Kirchner, as well as interventionist policies such as price and export controls on beef, which they say have discouraged investment and reduced the supply of cattle...For her part, Mrs. Kirchner blames rising meat prices on Argentine ranchers, whom she says aren't bringing enough cattle to market....Eduardo Buzzi, head of the Argentine Agrarian Federation, an industry group, called Mrs. Kirchner's comments "tragicomic."He faulted "antiproductive" government farm policies, such as controls on domestic beef prices and on the amount of beef that can be exported....Agrarian economists say government meddling has been so disruptive that many ranchers have liquidated herds and turned to farming. A drought last year also hurt ranchers...Argentina's total cattle herd has fallen to 50 million head from around 61 million in 2007, according to the Argentine Rural Society, a landowners group."
It is mistaken to believe that if you artificially set a price below the generally accepted market price you will have a higher quantity of beef supplied and that the quantity demanded for beef will not be MORE than it was before the price control.  The only way to bring it back into equilibrium would be to reduce demand...

"Private economists calculated last month's inflation at more than 2%, the highest level for a January since 1992, though the officially calculated rate is lower. Especially painful—for the world's largest per capita beef-consuming nation—are increases in beef prices of roughly 25% so far this year."
It certainly does not seem likely that this will happen in the domestic market for beef in Argentina. They seem to love their burgers and steaks.  Graphically, a price ceiling  looks like this:

A price below the equilibrium price will reduce the Quantity Supplied to Qs and increase the Quantity Demanded to Qd...As evidenced in the market for beef in Argentina, the predictable shortage is driving up the domestic market price for consumers. Also, the international market does not benefit from Argentinian beef and it serves to increase the international price of beef, therefore OUR prices in a tangible way...Bottomline---ranchers are hurt, consumers are hurt with higher prices---who benefits in this scenario?? Anyone? Anyone? Anyone? 
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