There appears to be a rule: if you want something to be poorly supplied declare it “essential” and put government in charge of its provision.

Venezuela was recently in the news for running out of toilet paper.  Unlike other countries where governments don’t have to put a thought to whether people will have toilet paper or not, the Venezuelan government has had to make conscious efforts to import 50 million rolls.

The economically ignorant will be bemused and wonder why this is so. But with a little economic education, this becomes a predictable phenomenon: Venezuela’s expansionary monetary policy causes inflation, but instead of allowing prices to rise, the government has mandated price ceilings on commodities so that they can only be supplied at a lossThus no toilet paper.

To take another example closer to home, the same thing happened in India with foreign exchange several times before ’91.  The Indian government inflated the money supply to pay for its deficit spending, causing the value of the rupee to fall in terms of goods and foreign currencies. But the Indian government fixed the price of foreign currencies in terms of rupees, not allowing their prices to rise.  Thus, again, there were chronic shortages, i.e., “foreign exchange crises.”

So when we see Venezuelans rushing to the shelves to get the last roll of toilet paper they might see for months, we should remember that price controls are a cure that is worse than the disease.



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The opinions expressed in this essay are those of the authors. They do not purport to reflect the opinions or views of CCS.