Chapter 6 Reflection

In April there was a flurry of blog posts from economists on price controls and inflation in Venezuela.

 Read this article from the Times: http://www.nytimes.com/2012/04/21/world/americas/venezuela-faces-shortages-in-grocery-staples.html?_r=1 and this post from Cafe Hayek: http://cafehayek.com/2012/04/but-hes-our-leader-exploiting-our-economic-ignorance.html. (If this doesn't open see below).

 How does this relate to the theories from the chapter?

                The concept of price floors can be exemplified from this article in the way of coffee.  The text defines a price floor as a legal minimum on the price at which a good can be sold.  If only a few years ago Venezuela was an exporter of coffee and now finds itself importing the good, you would have to stop and ask yourself, why?  The article goes on to explain that since government price controls have set the retail price for coffee so low that it is below what it costs for farmers to grow it; therefore, practically eliminating the incentive to do so. 

                The text states that when the government imposes a price ceiling on a competitive market, a shortage of the good arises, and sellers must ration the scarce good among the large number of potential buyers.  “Rationing mechanisms” are shown by the article in the way of long lines and people not being able to buy the most basic goods like toilet paper and cooking oil.  These items in a free market are rationed in relationship to their price which occurs through the process of equilibrium.  Venezuela, however operates in a capitalist economy.  The article demonstrates this when it says that the government has taken private ownership of dairy and coffee companies stating “it is in the national interest” to do so.

 

Now consider a different case.  After Hurricane Katrina speculators brought in bottled water, but charged quite a lot for it.  What might have happened had price controls been imposed?  Where does the concept of fairness fit into this theory?

                If a price control had been imposed on bottled water for victims of Hurricane Katrina they would not have been as expensive as they were.  According to my Google search, bottles of water were selling for roughly $7 per bottle.  Anyone who buys it at the store or the gas station during non-disaster times probably pays around $1.  I can only imagine that there were price gougers who charged even more due to the magnitude of Katrina.  Under different circumstances I may have considered this entrepreneurial, however taking into consideration the scale of this catastrophe this is an example of people taking remarkable advantage of others in the most dire of times.  No one is more in need of water than someone else during a time like that, therefore it is certainly unfair to only sell it at such an inflated price to only those who are either able and/or willing to purchase it.  Speculators do nothing more than try to gain a quick advantage from the anticipated increase in the demand of a good.