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For example in Cuba and Venezuela the governments apply rationing and maximum prices. I have studied in the history that these policies, instead of improving living standards, always bring a generalized scarcity and contribute to the development of black market.

I don't know if there exist other governments applying such policies of rationing and maximum prices, but why they continue doing this. What is the idea behind that, how do they prove these methods work?

I think they should know about the Ludwig Erhard's miracle how its know in Spanish.

Saeid
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Emilio Gort
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3 Answers3

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The point of rationing or price controls is not to prevent a scarcity as such. It is to ensure a reasonably equitable distribution of the scarce resource.

Let's imagine there is a limited supply of some commodity. If no controls are in place, then the prices rise - probably very steeply if the shortage is significant. People with lots of money are still able to afford the price, but most people are not. If the commodity is a luxury, this is merely annoying. But if it is a necessity, like gasoline, then significant problems start to arise. Small businesses can't afford to make deliveries. Workers can't afford to get to work. There start to be very serious effects on the economy - meanwhile the rich are still driving around in sports cars, using as much gasoline as they feel like.

It's this sort of thing that both rationing and price caps are designed to prevent. Most governments apply rationing and price controls only in a time of crisis. It's certainly not a socialist thing - most nations, including the US, implemented some sort of rationing in World War II, and plenty had plans to in the 1973 oil crisis. The European Economic Community implemented price controls in the 1970s.

Of the two examples mentioned, Cuba could reasonably be thought of as in a permanent crisis due to the US embargo.

DJClayworth
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  • Due to the US embargo?? Or the cuban gov embargo?? – Emilio Gort Mar 20 '14 at 20:38
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    @EmilioGort Due to the US embargo. – DJClayworth Mar 20 '14 at 20:39
  • It's a good answer, just the topic about the why is cuba in permanent crisis for 53 years may be to broad or opinion based...thanks for the explanation. – Emilio Gort Mar 20 '14 at 20:41
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    The US didn't plan to implement price controls and rationing of gasoline during the oil crisis. It did and it caused shortages. It was a disaster! US consumers didn't conserve gasoline. Businesses didn't have economic incentive to improvise. Instead people wanted in lines for gas. It was stupid. – Razie Mah Mar 21 '14 at 00:16
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This can also be due to the chicken-egg problem.

The govt has to spend money on either subsidies(rationing) or to improve standard of living.Subsidies take much less time to implement than improving standard of living.Once a country chooses subsidies, it gets stuck into the chicken-egg problem.This is how it happens,

  1. If the govt decides to remove subsidies, the poor people depending on the subsidies won't vote for the govt.
  2. Consequently, the opposite party would guarantee people subsidies to get votes.

  3. So the ruling party would cancel it's plans to cancel subsidies.

  4. Back to point 1.

In India, this is happening for years on.There is need to decrease subsidies to invest more money on defense and improving standard of living.But no ruling party wants to take the lead.

Registered User
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Yes, rationing and maximum prices, also called a price ceiling (minimum or price floors are another common element) always causes more scarcity. They may not always cause a black market, but it happens frequently. I would say that these are a common feature of all modern industrialized nations. But some nations use them more frequently and are more restrictive.

Price controls are derived from socialism, which is an economic philosophy that does not use price to control supply and demand for goods in the economy. The government attempts to centrally control supply and demand through coordinated rationing systems. It therefore makes sense that nations, such as Cuba and Venezuela, that have a socialist economy rely more heavily on price controls.

There is likely huge disagreement everywhere about if and how price controls work in each country where they are implemented, so I will just give one example. In the US, we spend a great deal of money on agricultural subsidies for the purposes of maintaining steady agricultural markets for farmers and food prices for the poor and middle class. It has warped the domestic and international agricultural markets in many negative ways, benefiting large agricorporations like Monsanto. While Americans are far from going hungry, we are actually using less and less of our farm land and people refuse to become farmers under this system, so I would argue the US is likely producing less food and especially the food people want to eat than we would otherwise. In support of maintaining this system is that also agriculture is the US's largest export, so no one wants to stop subsidizing it. Venezuela has a similar problem with oil, but worse, since they have actually nationalized their oil industry.

Unfortunately, I feel that the leaders of Cuba have had adequate time to digest modern economic theories already. It appears to be an ideological problem.

Razie Mah
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    Plenty of non-socialist government implement both rationing and price controls when they need to. – DJClayworth Mar 20 '14 at 20:36
  • Cuba also has some severe shortages due to the US embargo. – DJClayworth Mar 20 '14 at 20:36
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    @DJClayworth Hmmmm, US embargo is not quite that powerful. There's many places to buy goods, especially oil! pesticides! food! that they need. Europeans go to Cuba on vacation now. Many in US consider it pointless, politics only, Cold War hold-over policy. That's been in place for 48 years, but Cuba just now has bad shortages. They lost subsidies from the Soviet Union when Cold War ended. Cuba was never functioning efficiently is the problem and too much state control makes their shortages worse and creates black markets. – Razie Mah Mar 20 '14 at 21:18
  • 1959+ The Cuban economy was always in crisis with or without the help of URSS, Venezuela and China. In fact more than 60% of food imports to Cuba are from USA, I know because I lived in Cuba until 2009 and I saw the ships unloading the goods. The embargo is stronger in the technological aspect. – Emilio Gort Mar 21 '14 at 01:11
  • @RazieMah - given the 50+ years of economic stranglehold by the most powerful country on Earth, would you say that Cuba is functioning substantially more efficiently than other similar countries such Haiti, Dominican Republic, or Guatemala. Isn't that a proof that socialism is a better system than capitalism, at least for the majority of population? – ebhh2001 Sep 28 '16 at 19:58