Communism Lives

Why does the country with the world’s largest oil reserves and the 4th largest river face an energy shortage?

Answer below the jump.

“Some people sing in the bath for half an hour. What kind of communism is that? Three minutes is more than enough!”

While I admit I’m ignorant of the specifics of this situation, it’s a reasonable assumption that Chavez’s nationalization of energy companies has created the shortage. The two main suspects are mismanagement of inefficient state owned enterprises and inadequate price flexibility to equilibrate the market.

The state owned enterprises pay for their inputs with money they receive from the state. A committee or person has to figure out how much inputs the enterprise requires to produce a certain level of output. There are many flaws with this central planning mechanism, and I leave the specifics as a thought experiment. Here are two useful places to start:

1. Think about what incentives different stakeholders in the process have.
2. Consider the ramifications of a monopoly that has state force behind it.

The state owned company then offers the output on the market for a politically feasible, but artificially low price. I call on Duke Professor Mike Munger to explain the consequences of price rigidity.

Mr. Chavez, please let go of Venezuela. It’s not working and things will not improve until you leave.