Question

government intervention in the marketplace - that has been in the news quite a bit lately. Research how price ceilings in Venezuela have contributed to the extreme political and social unrest in that very disturbed country.

Answer 1

In the free market, prices function as signals to both consumers and producers of how much of a product or service must be demanded or supplied respectively. For producers, prices communicate whether it is a good time to enter or leave a certain market. For producers low prices indicates to supply less and high prices indicates to supply more. For consumers low prices indicates to demand more and high prices indicates to demand low.

When price ceilings are implemented, this price coordination mechanism is turned on its head. An artificially low price leads consumers to demand more of a good than producers are willing to supply. When demand outstrips supply, shortages emerge.

many businesses are forced to incur losses, especially if the legislated price falls below the natural market price that is needed to meet operational costs. Less fortunate enterprises will find themselves compelled to shut down their operations as they can no longer afford to supply goods to the market given the artificially low prices.

Businesses that have the means to adjust to these regulations end up supplying less products or products of inferior quality. Consumers must then cope with a market that provides fewer and inferior goods, thus leading to lower consumer welfare . The result of such measures has always been the same — shortages and black market activity. It took three weeks on long lines to get single packet of corn flour from super market. So people started moving towards black markets.