Jun 29

Down The Drain

article toilet paper

Down The Drain

by Joseph Miguel

Q.   How can you tell when your economy is going down the drain?

A.    When you run out of toilet paper.

In May of this year, Venezuela was dangerously close to running out of toilet paper. The commerce minister was forced to import millions of toilet paper rolls.

How does a country run out of toilet paper? It is actually the result of having too much of another type of paper, money. Venezuela has been trying to fend off inflation through price controls on commodities: such as, milk, butter, coffee, and toilet paper. Many countries, including the United States of America, experience inflation when they spend more money than they have. When the bills are due, they simply print more money. Unfortunately, an increase in the supply of money results in a decrease in the purchasing power of money. For example, a loaf of bread used to be purchased for only a dime, now it costs a lot more because of inflation. Some countries will try to limit inflation by imposing price controls; when this is done, the government will proclaim that companies are not allowed to charge more than $1.50 for a roll of toilet paper.  If toilet paper companies do not comply, they will be wiped out by the government.

Most consumers are big fans of price controls, but, if they knew what was good for them, they would realize that price controls are a crappy deal. Price controls sound good, but they cause nothing but trouble. To be fair, price controls do have some benefits at the beginning. In the short-term, consumers benefit by being able to purchase toilet paper rolls at a lower price than the makers of toilet paper would like to charge. Problems occur when the price that producers of toilet paper can charge dramatically differs from what it costs to produce the toilet paper. When the price to produce toilet paper goes up in a free market, producers are able to increase the cost of toilet paper. If they do not increase what customers pay, toilet paper companies will see their profits go down the drain. If toilet paper companies lose enough money, they will stop making toilet paper, because there is no way to make money off of it. When enough companies stop producing toilet paper, the supply of toilet paper starts to decrease, which results in a shortage of toilet paper.

How can an economy bring back the toilet paper? It is easy, eliminate price controls. In the short-term, the cost of toilet paper will go up, because there is a lot of pent up demand for toilet paper. Eventually, the supply will increase as people start to limit the amount they purchase and companies start to produce more toilet paper. In the long run, the price for toilet paper will eventually normalize after companies produce the optimal amount of toilet paper. The other option would be for countries to keep the price controls, which would result in a mounting mess with no way to clean it up.


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