Government Intervention in Venezuela's Economy

Topics: Supply and demand, Free market, Economic equilibrium Pages: 2 (893 words) Published: November 13, 2012
Economic Commentary_1
The article: How can Venezuela be so rich in resources, but so low in supplies? By Douglas French/April 24, 2012 To what extend do a country’s natural resources explain whether consumer goods are on the nation’s shelves for people to buy. Venezuela is a prime example of this question. This is a country having abundant natural resources for it is one of the world’s top oil producers and rich in gold and other minerals, also the rich soil and temperate climate allow the country for productive agriculture. However, there are shortages of staple products like milk, meat and writing paper. This commentary focuses on the main reason causing this problem in Venezuela that is over intervention of the government towards the free market. In order to maintain the level of consumer prices, the president of Venezuela imposed price controls by setting the price ceilings. Government officials claim “companies cause shortages on purpose, holding products off the market to push up prices. This month, the government required price cuts on fruit juice, toothpaste, disposable diapers and more than a dozen other products.” However, bad consequences of the price ceilings set by the government were inevitable in terms of shortages in supply, decreased market size, elimination of allocative efficiency and black markets. In figure1.1, the original market equilibrium price under the intervention of free market is at Pe where the quantity demanded and the quantity supplied are equal. After intervention of the central government, a binding price ceiling is set and the new market price is created at Pmax where the quantity supplied is much lower than quantity demanded. The artificially low price has caused more demand for the product, thus creating a movement from Qe along the demand curve to Qd. At the same time, producers cut...
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