Sunday, June 20, 2010

I know it is shallow and out of vogue, but sometimes basic economic principles work out---who would have thought?...

"The curious task of economics is to demonstrate to men how little they know about what they imagine they can design"--F.A. Hayek

Within the fist 150 pages, or so, of ANY introductory Economics textbook you will find instruction on the effects of price controls by the government.  The two primary price controls are Price Ceilings and Price Floors.  The two articles below are excellent examples of Price Ceilings and their predictable consequences.  Price ceilings are government set prices of goods/services that are below the current market equilibrium prices of said goods/services, which were presumably determined through the market mechanism of supply and demand.  Price ceilings tend to create shortages in the market place because (1) the price is not high enough for producers to supply the market profitably therefore the quantity supplied to the market decreases or (2) there is ample supply but suppliers with-hold the goods because they can get a higher price on the "black market ", which is a subset of the informal economy as it is referred to in more board terms.  The second reason may be the culprit in the short run as suppliers do their best to keep adequate inventory or meet the market price in the informal economy (be "greedy", if you will).  However, the debilitating effects of a price ceiling in the long run will be to effectively create chronic shortages of a good in the market place.  If the private market price, where supply equals demand, REALLY reflects the cost of producing a good and the government deems that too high and mandates a lower price, then it is a prescription for decreases in the quantity supplied hence shortages of the good. 

Hugo Chavez Spearheads Raids as Food Prices Skyrocket
""Mountains of rotting food found at a government warehouse, soaring prices and soldiers raiding wholesalers accused of hoarding: Food supply is the latest battle in President Hugo Chavez's socialist revolution....Much of the wasted food, including powdered milk and meat, was found last month in the buildup to legislative elections in September. The scandal is humiliating for Chavez, who accuses wealthy elites of fueling inflation and causing shortages of products such as meat, sugar and milk by hoarding food...Food prices are up 41 percent in the last 12 months during a deep recession, government figures show, despite the government's growing network of state-run supermarkets that sell at discounts of up to 40 percent and are popular with his poor supporters...."We are bringing order to prices," Trade Minister Richard Canan told Reuters during the Catia raid. "There are traders who are taking these products to the black market ... That is a crime and our government will continue to target these stores."
Philippine Price Controls Hamper Rise of Generics

The Philippines recent embrace of drug-price controls to lower the cost of life-saving medications is creating some unexpected problems—including crimping the supply of inexpensive generic drugs. The country's president, Gloria Macapagal Arroyo, was eager to reduce the cost of pharmaceuticals in a nation where a third of its 95 million citizens live on around $2 a day. Last August, she used new regulations to cut the cost of five widely used medications, including Pfizer Inc.'s Norvasc hypertension drug and GlaxoSmithKline PLC's Augmentin antibiotic.  Facing mandatory price cuts, drug companies in the Philippines cut the prices of an additional 16 drugs, and in February agreed to slash the prices of frequently prescribed medicines
Industry analysts and executives said the price caps have unintentionally knocked the wind out of a nascent generic-drugs industry that had sprung up here. Lower-priced brand- name drugs are pressuring these low-cost producers, and creating a policy challenge for President-elect Benigno Aquino III, who takes over at the end of June.

Edward Isaac, executive director of the Philippine Chamber of the Pharmaceutical Industry, said price controls and the threat of more caps have lowered the cost of some brand-name drugs to near those of generic competitors. Pfizer's Norvasc was cut to about 22 pesos, or 47 cents, for a five milligram tablet, from over 44 pesos.
"What's happening now is that when the price of Norvasc, for example, is cut, the generics have to slash their own prices," Mr. Isaac said.
Declining profits have some drug retailers putting expansion plans on hold. "We've not opened any new stores since the price controls were introduced," said Leonila Ocampo, vice president of Manila-based MedExpress. The drugstore chain has seen sales volumes drop since the price controls were introduced. "Our margins are under pressure, and if there's no profit, I don't know what will happen," said Ms. Ocampo.
Another drug store operator, Florecita Intal of Stardust Drugs & Medical Supplies Corp., said lower revenues from the branded-drug price caps restricts her ability to expand and offer less expensive generics. She fears smaller retailers might not survive.
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