Thursday, May 16, 2013

If you are going to have a Socialist Revolution you better have some toilet paper. Oh, and take a basic Econ class too

Venezuelans are learning a hard lesson that could have been avoided if their leader took a basic economics class.  The lesson is on the price paid, literally and figuratively, when price controls are imposed on a market in the name of serving a "social good".

Venezuela hopes to wipe out toilet paper shortage by importing 50m rolls
First milk, butter, coffee and cornmeal ran short. Now Venezuela is running out of the most basic of necessities – toilet paper.
Blaming political opponents for the shortfall, as it does for other shortages, the government says it will import 50m rolls to boost supplies.
Economists say Venezuela's shortages stem from price controls meant to make basic goods available to the poorest parts of society and the government's controls on foreign currency.
"State-controlled prices – prices that are set below market-clearing price – always result in shortages. The shortage problem will only get worse, as it did over the years in the Soviet Union," said Steve Hanke, professor of economics at Johns Hopkins University. 
 If you don't believe in downward sloping Demand Curves and/or upward sloping Supply Curves, then, well, you might be a beloved Populist Leader of a people who don't access to toilet paper. 

It might be just me, but I prefer to love my leaders a bit less and have a bit more toilet paper. But then again, I am a simple man...

Graphically, here is how a specific price control---a Price Ceiling works. 

Here is our Market for Toilet Paper in "free" market equilibrium.  At price "Pe" the Quantity Supplied of TP is equal to Quantity Demanded for TP at Point "A".
Fearless Populist Leader believes that the market price is too high.  Fearless Leader imposes a price on the market that is BELOW the established market price.  This price is called a Price Ceiling---by law the good cannot be priced ABOVE this government set price.

In the next graph, at "P Ceiling" the quantity supplied by domestic producers is now "Q supplied"(Point "B:")  and the quantity demanded is "Q demanded" (Point "C"). 

At the lower price producers will supply SOME toilet paper, but not as much as before because the lower price (assuming production costs stay the same) makes it less profitable.  There is movement ALONG the Supply Curve from Point "A" to Point "B".

At the lower price consumers will increase their quantity demanded from Point "A" to Point "C"---there is movement ALONG the Demand Curve as the price decreases.
You can easily see what is happening on the ground in Venezuela.  At the lower price consumers are "stocking up" on toliet paper at the same time producers are cutting back on production.  With no corresponding change in price allowed, we quickly move into a situation where Quantity Demanded is greater than Quantity Supplied and a SHORTAGE emerges.

Fealess Leader for some reason does not anticipate this and is quite shocked by the outcome.  Now he/she has to pivot and go buy 50 million rolls from SOME OTHER COUNTRY in order to make up for the shortfall.
The result of the Price Control?  Domestic producers/suppliers and their employees are hurt (presumably they use toilet paper too), some consumers have pantry's full of toilet paper but most go without (can you say emergence of "Black Market" trade in TP?), and the government has to use money to buy toilet paper instead of, well, fill in the blank.

Dear Fearless Leader it is called "Econ" usually with a number, like, "101" following it.  It might cost you some money to enroll, but it will be much less than the cost of 50 million roles of TP. 

Just sayin'...

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