Question 4 30 Points Case study 1 Price controls in Venezuela Venezuela, once one of the richest South American countries due to its oil reserves, is now facing an economic free fall. A all. in the price of oil since 2014 accompanied with bad government policies have produced an economic crisis. As a result the economy is shrinking, Venezuelans are becoming poorer and basic goods, such as food, are becoming scarcer due to the inability to produce them or import them in the quantities needed for the population. The Venezuelan government, in an attempt to contrast food scarcity and so its rising price, introduced the Fair Price Law, effectively introducing price ceilings, to keep the cost of food affordable. We have just just seen that price ceilings may actually not work in the way the government wants. Indeed, this is the case in Venezuela. The introduction of food price ceilings made many producers unprofitable causing them to stop producing and worsening shortages. When food rationing is in place due to the introduction of a price ceiling, how food is allocated? There are two possibilities: (a) the Venezuelans that can afford it turned to expensive imports and black markets for food. As a result the black market prices of food spiked. For example, the price ceiling for coffee is set at around 3,000 Bolivar (the currency of Venezuela), but the black market price is more than 7,000 Bolivar; (b) the Venezuelans that cannot afford imports and black market prices, need to queue at supermarkets and shops to obtain food. Source: adapted from "How Food in Venezuela Went From Subsidized to Scarce', New York Times, https://www.nytimes.com/ interactive/2017/07/16/world/americas/venezuela-shortages.html Questions 1] Describe what is meant by a government intervention, called a price ceiling. (5 points) 2] Briefly discus the reasons behind, and the economic effects of, price controls. (10 points) 3] Analyse the societal benefits of the Venezuelan governments legislative action termed the 'Fair Price Law' and consider advice you might give to future government policymakers. (15 points)