Governments can't control food prices

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governments-cant-control-food-prices

grainMaintaining stable food prices has become a common policy goal, especially in the developing world in which basic food goods might otherwise be inaccessible. On the surface, this seems like the only humane course; however, governments may actually have less altruistic reasons for supporting this price controls. Rather, they may be worried about their own survival rather than that of their people.

Throughout history food prices have been a reccurring grievance and cause for political agitation. With examples such the women’s march on Versailles during the French Revolution and all the way to the more recent riots in Tunisia, its no wonder political leaders try to maintain stable prices of food. Their livelihoods (and lives) may depend on it.

Despite these domestic pressures, measures aimed at reducing food price’s volatility virtually always do more harm then good. Consider a policy of a price ceiling on sugar: in response to the excess demand over supply (which a price rise would balance out), the government would either have to ration sugar or meet the demand through importation, which would only raise the world market price of sugar even more. The former is inefficient and the latter is unsustainable.

On the world stage these policies create more pricing problems than the individual fluctuations would. Consider the case of a country that produces a given food commodity and whose government wants to shield its citizens from price increases on the global market. That government might impose export controls, or limits to the quantity of that commodity that could be exported. However, this again has counter-intuitive effects: the export controls reduce the total supply on the global market, which increases the commodity’s price. Furthermore, domestic producers that can’t sell their goods for their full value either domestically or on the international market price will substitute away from production of that good, further reducing supply and thus further increasing price. Export controls simply impoverish the farmers even more.

Price controls don't pay off. The best ways to ensure long-term stability in food prices is not through short-term gimmicks like price and export controls that distort the market. Instead the government should aim to reduce trade barriers so that the maximum amount of supply can reach the international markets, from which it can be allocated efficiently.