Problem
A few years ago there was a flurry of blog posts from economists on price controls and inflation in Venezuela. SInce then Venezuela has been more or less continuously in the news as it's economy continues to to spiral down.
Read this article from Reuters: "Venezuela sets new price controls, with eggs costing more than a month's wages" By Reuters Staff.
How does this relate to the theories from the chapter? We think of price controls as being set below equilibrium prices and also below what people can afford. What do you expect to happen to the supply of eggs? Why? In general what effect do low price ceilings have on supply? What happens to the information contained in a price when it is set by law rather than developed through market interactions?
Now consider a different case. After Hurricane Katrina and after Hurricane Sandy speculators brought in bottled water, but charged quite a lot for it. What might have happened had price controls been imposed? How might speculators have responded? What would have happened to the quantity supplied of water? How about the quantity demanded? Where does the concept of fairness fit into this subject? Again, what happens to the signals to both consumers and producers embedded in a price when it is not allowed to rise in response to changes in demand or supply? Would you choose to impose price controls in a disaster situation? Why or why not?