A textbook graph that even Augusto Costa and Cristina Kirchner should be able to understand

Argentina is an economic basket case. It is that simple. The country never seems to be able to emerge from its problems. The key reason is that the country is extremely weak constitutionally and institutionally and as a result the country has some of the worst policy makers in Latin America (if not in the world).

You probably don’t need a lot of further confirmation of the fact that Argentina has horrible policy makers, but try to take a look at this story from Bloomberg anyway:

Argentina’s government pledged that a new system of price controls introduced today won’t lead to the shortages that have crippled other countries’ attempts to enforce cost-cuts for consumers.

The government will use computer software to monitor prices on 194 products in the Greater Buenos Aires area, Commerce Secretary Augusto Costa said today in a press conference. The “voluntary” agreement comprises 10 supermarket chains and 65 suppliers and will incorporate other regions of the country during January, Costa said.

The accord follows a similar agreement in June when the government froze the price of 500 goods on supermarket shelves in a bid to rein in the region’s second-fastest inflation. Government and consumer vigilance along with fines and the threat of closure will stop supermarkets from reducing stocks and creating shortages, Costa said. About 1 in 5 products can’t be found on supermarket shelves in Venezuela where more than 100 products are price controlled.

“The prices we are agreeing today are viable prices — they’re reasonable from the point of view of production, distribution and commercialization,” Costa said. “They’re prices that will guarantee adequate supply but that won’t allow for disproportionate and unjustifiable costs that we’ve detected in certain cases.”

I sometimes get the impression that nobody in Argentina studied any economics (I know good Argentine economists so I know that that is not true) so maybe we should help the policy makers with a simple graph that explains what happens when you introduce price controls (a price ceiling). See here.

512px-Binding-price-ceiling

I stole the graph from Wikipieda, but you can find a similar graph in any intermediate microeconomic textbook. I suggest that Augusto Costa and his boss president Cristina Kirchner try to get hold of such textbook very soon so this foolishness can come to an end once and for all!

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7 Comments

  1. Dustin

     /  January 4, 2014

    ‘Deadweight loss’ is just such an abstract notion for most folks that the costs is often ignored, it isn’t readily tangible – meanwhile, the perceived benefit to the masses of price controls is too compelling a result. Particularly at a political level, the supportive ‘cheaper stuff’ sound bite has a better ring than the opposing ‘deadweight loss’ sound bite.

    Reply
  2. Reblogueó esto en Rogelio "Roy" Vazquezy comentado:
    Something to think about..seriously

    Reply
  3. Benjamin Cole

     /  January 5, 2014

    Excellent blogging—but as an American, I cannot look down my nose too much.

    Seems like yesterday the USA instituted wage and price controls…under President Nixon no less.

    And the eminent John Galbraith (I think it was) said wage and price controls worked during WWII so could work again.

    Poor Argentina. In the 1930s through 1950s, it was said living in Argentina was better than almost anywhere in the world, and Buenos Aires rivaled European capitals. They ate more beef than Americans.

    I hope they can get better.

    Reply
  4. Reblogged this on Econ Point of View and commented:
    Econ 101-> Price Ceilings = shortages = deadweight losses

    Reply
  5. Mabuse

     /  January 5, 2014

    Hi Lars,

    On a somewhat related note, what do you think of Chile’s Unidad de Fomento? I’ve been wondering what Market Monetarists make of the idea of a dedicated unit of account, separate from money, designed to provide a constant measurement of purchasing power with which to denominate prices and wages. Would such a thing be compatible with an NGDP level targeting monetary regime? I asked Scott and he said that NGDP level targeting would make such a unit un-necessary, but then again he also thinks that inflation isn’t real, so I’d like your thoughts on the idea.

    Reply
  6. I was just reading an article about activists balloon-lifting subversive materials into the North Korean regime. Perhaps someone needs to balloon-lift Mankiw’s principles text into Argentina!

    Reply
  1. The ‘EKG’ of price control systems | Historinhas

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