Maximum prices – the problem’s in the detail

A remarkable event took place in Venezuela on Friday 8th November. Soldiers, on the orders of the president, temporarily occupied a chain of shops run by a leading electrical retailer called Dakar. The shops were forced to cut the prices of their electrical appliances and five managers were arrested and accused of ‘hiking up’ prices.

Unsurprisingly, news of these lower prices spread very quickly and long queues rapidly appeared outside the stores as people hoped to buy plasma televisions, fridges and washing machines at bargain prices. On Sunday 9th November, the president, Nicolas Maduro, gave a televised address in which he condemned the owners of the stores and announced that he was going to ask the National Assembly to grant him extra powers so that he could extend price controls to all consumer goods. He stated that he would next turn his attention to stores selling toys, cars, textiles and shoes.

The use of price controls in Venezuela is not new and dates back to 2003 when they were first introduced by the then president Hugo Chavez. Initially the regulations were imposed on various foods and basic goods. For example, by 2009 maximum prices had been set for cooking oil, white rice, sugar, coffee, flour, margarine, pasta and cheese. Businesses often complained that the maximum prices set by the government were below the costs of production. For example after a maximum price of 2.15 Bolivares was placed on a kilo of rice, producers argued that the cost of producing a kilo of rice was 4.41 Bolivares.

The impact of the maximum prices in Venezuela appears to have been exactly what the theories in the economics textbooks would have predicted – shortages, long queues of people waiting outside shops and a flourishing black market. An article on the shortage of toilet rolls has been discussed in a previous article on this news site: Shortages in Venezuela- what’s the solution? However this has not stopped the Venezuelan government extending the scheme and increasing the number of products that have maximum prices imposed on them. In 2011 Hugo Chavez argued that the policy was required because:

The market has…become a perverse mechanism where big monopolies, the big trans-nationals and the bourgeoise dominate and ransack the people.

Economics textbooks often include some analysis of the impact of price ceilings on a competitive market. The effects on consumer surplus, producer surplus and deadweight welfare are usually discussed. However the potential administrative costs are rarely considered. The Venezuelan case helps to illustrate how in practise these costs could be quite significant.

For example, in April 2012 price controls in Venezuela were extended to a range of 19 products including fruit juice, toilet paper, nappies, soap, detergent, deodorant, toothpaste, baby food, floor polish, mineral water and razor blades. This caused a reduction in prices of between 4% and 25%. However this did not simply mean setting 19 different maximum prices because the goods were all sold in different quantities or different package sizes. For example a tube of toothpaste could be purchased in 4 different sizes – 50ml, 75ml, 100ml and 150 ml. Therefore officials had to set 4 different figures. Nappies were sold in 12 different package sizes ranging from10 nappies/packet to78 nappies/packet. Once again this meant that the administrators had to set 10 different maximum prices just for nappies. In total across the 19 products government officials had to set prices for 616 different individual items!! Companies were given just one month to adjust to the new legislation.

Whenever maximum prices are imposed on a competitive market both frustrated buyers and sellers have an incentive to evade them and trade illegally. Therefore the government established a number of organisations in an attempt to make sure the prices were enforced. One agency is called The National Superintendency of Fair Costs and Prices or Sundecop. Officials from this agency were sent out to 82 retail outlets in April 2012 to try to make sure that firms were sticking to the new regulated prices. They also printed and handed out leaflets to the public informing them of the changes. Another agency is called ‘The Institute for the Defense of People’s Access to Goods and Services’ or ‘Indepabis’. This organisation launched a new strategy in June 2012 in order to monitor compliance. This included the creation of a network called the Friends of Indepabis which would act as an information point for members of the public to report illegal pricing. A new complaints phone line was also introduced.

If president Maduro is granted the power to extend maximum prices to all consumer products, then one can only begin to imagine the extra administrative costs involved with implementing the policy.

Venezuelan president Maduro ‘to expand price controls’ BBC News (11/11/13)
Venezuela sends in troops to force electronics chain to charge ‘fair’ prices NBC News (13/11/13)
Venezuela appliances crackdown spurs uncertainty ABC news (13/11/13)
Venezuela’s government seizes electronic goods shops BBC News (9/11/13)
Venezuelan government sends TROOPS into electronics chain to force them to sell goods at a “fair price” DailyMirror (10/11/13)
Shocher: Price Controls Lead to Shortages in Venezuela Free Advice, Robert Murphy (2/10/13)
Venezuelan Government Action against Overpricing Welcomed by Citizens, Manipulated by Media venezuelanalysis (12/11/13).

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