Laura Arroyo, June 15th 2016
Recently, my cousin traveled to Cuba. She said in all the grocery stores she saw there, the shelves were nearly empty. But I couldn’t figure out why. Didn’t the government assign people to produce food, and stock the stores with enough for everyone? Not exactly; it involves supply and demand, incentives, and price controls.
Under communism, the government controls every aspect of buying, selling, and producers – and who does what. The government “tells stores what items to stock,” and how many (1). Because it’s all government-controlled, supply and demand is artificial, and doesn’t actually reflect what the people need and want. The government determines the price of everything, and everything must be sold at that price (1). This makes the idea of market equilibrium a moot point. Market equilibrium is when everything produced in an economy is sold; there are no shortages or surpluses, because producers produce exactly as much as people want to buy, and people buy it at a price that both parties agree on. This price is known as the Market Clearing Price. If a producer were to try to raise a price, people just wouldn’t buy the good – and the producer, wanting to sell, would simply lower the price back to equilibrium, no government intervention needed. In a communist country, market equilibrium is impossible. Cubans have a huge demand for all kinds of goods. But since the government keeps the price fixed, even if demand changes for a particular good, it has no impact on supply. Producers will be paid the same whether or not they produce enough to meet demand. Take cigars, for example. “Every shopkeeper selling cigars is paid the government wage for selling cigars, which is unrelated to how many cigars he or she sells” (1). The shopkeeper has no incentive to change how much he/she produces because they won’t make more or less money either way. Even if they have another incentive to match demand, they can’t, because the government dictates who produces what, and when, and how much. In a free market, producers change their supply when they want to, in order to make more money. If more people want a certain good, like salmon at restaurants, then the price will go up. More fisherman, wanting to make more money, will fish for salmon (1). This happens naturally, as supply and demand change to match each other. In Cuba, the government must first notice that there is a shortage of a good before they assign a producer to produce it. Therefore, if the demand for milk goes up, supply will not match the increase in demand because the producers have no incentive to do so since they can’t make more money. This will create a shortage in milk, and once consumers have bought all the milk produced at any given time, there will not be any more milk for some people until the government tells someone to make more. This happens with every product that experiences a change in demand – or every product that the government just doesn’t tell producers to make enough of – leaving the shelves empty, and people unable to buy desired goods.
- Wheelan, Charles J., and Burton Gordon Malkiel. Naked Economics: Undressing the Dismal Science. New York: W.W. Norton, 2010.
Davis, Sean. Grocery Store in Cuba. Castro’s Cuba. In Sean Davis Photography Costa Rica. 2016. http://www.photographercostarica.com/cuba/. (image)