Price Ceilings and Venezuela

Elisa Queenan, Porterville College,
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Summary

This activity will examine a modern instance of price ceilings and the unintended consequences for the local economy. This activity details how the well-intended goal of a government can lead to disincentivizing producers and severe shortages.

Context for Use

This activity is appropriate for introductory microeconomics courses but can be expanded for more advanced knowledge. Student should have knowledge of what a price ceiling is, why they are utilized, and what the expected economic consequences are.

Overview

Price ceilings are a basic introductory economic concept. It is important for students to understand the technical analysis of price ceilings prior to attempting to understand the social and cultural ramifications.

The students will examine the impact of price ceilings placed on agricultural goods in the country of Venezuela. Students will consider the complex relationship between a government's desire to provide affordable food for their citizens and the consequences of disincentivizing producers

Expected Student Learning Outcomes

In this exercise students will be prompted to analyze the consequences of the government setting a price ceiling

Information Given to Students

Reading of, "Why are Venezuelans Starving?"

https://www.npr.org/sections/money/2019/03/20/705267066/why-are-venezuelans-starving

In the podcast "Why Are Venezuelans Starving," we saw a number of familiar economic concepts playing out. In an effort to make food more affordable for Venezuelans, the story began with President of Venezuela, Hugo Chávez, placing price ceilings on various agricultural products in both wholesale and retail markets, such as sugar and milk. It is the responsibility of government leaders to promote the well-being of their constituents. However, this policy did not benefit the Venezuelan people. You are the economist charged with examining why these price ceilings affected the entire country the way they did (based on the information presented in the podcast). Which of the following do you believe is most important to understand what transpired?

A. The farmers of Venezuela did not use their land resources correctly.
B. Setting the price below equilibrium meant people wanted to buy more food.
C. Setting the price below equilibrium disincentivized farmers from producing.
D. Producers will only produce if there is a high level of economic freedom.

Note: Every student must include the appropriate supply-demand analysis of a price ceiling in their notes for this exercise! (Some reporters will be called upon to explain the technical analysis of a price ceiling to the class.)

Teaching Notes and Tips

You can discuss the country of Venezuela, its government and culture if you choose. Depending on the type of discussion the instructor wishes the students to engage in, the time to narrow their answer could range from 5-10 minutes. While each choice can be defended to some degree, the best choice is C. If any of the other options are chosen and the instructor is to ask, 'Yes, but why...' it will lead the student back to choose C.
- Ask student reporters (randomly selected after teams have made their choice) to defend their reasoning
- Allow students to debate and discuss their choices and logic. In an introductory class having groups graph the price ceiling and its impact on equilibrium price and quantity can assist in guiding to the correct answer.
- This activity has a way of making students very uncomfortable. They are fine discussing price ceilings in a theoretical arena, but the podcast makes it very present for them, especially if you address current news. The reality that people are facing potential starvation due to government decisions can create some very good discussion.
- In closing, there should be a strong understanding of why price ceilings are utilized by the government and why in this situation it has proved so dire for the population of an entire country

Assessment

Students should graph the impact of a price ceiling on equilibrium price and quantity, generically. Then they should detail where each step began to impact both individual producers, the market as a whole and the local population in this specific situation. For example, what happened when the price ceiling was first introduced? How did it affect the individual producer? How did buyers react to the reduced prices? How did the price ceilings affect the market? Which economic agents are better off because of the price ceiling? Which economic agents are worse off because of the price ceiling?