Bloomberg news reports that consumers are buying large quantities of goods that will fall under new price caps (ceilings) in Venezuela, in an effort to control inflation. Karlin Granadillo, the head of a price control agency stated, "[t]he law of supply and demand is a lie..." in a TV report. Fair enough, let's take a look at what "the law of supply and demand" would predict when a government imposes a price ceiling and compare that with the actual behavior reported in the article linked above.
The supply and demand model states that when the government intervenes in the market and imposes a binding price ceiling, that the government set price will be below the market equilibrium price. CHECK.
The supply and demand model states that when the government intervenes in the market and imposes a binding price ceiling, that quantity demanded will be greater than quantity supplied resulting in a shortage. CHECK.
The supply and demand model states that when the government intervenes in the market and imposes a binding price ceiling and "black" markets occur, that the price in the black market will be greater than the government set price and people who purchase at the government price can resell the goods at the black market price and make a profit. CHECK.
The evidence does not support the hypothesis that the supply and demand model is a lie, and thus I must reject Granadillo's hypothesis that the supply and demand model is a lie in this case.
Thursday, February 9, 2012
Subscribe to:
Post Comments (Atom)
No comments:
Post a Comment