A recent CNN article discussed the market for pork in China. Declining numbers of pig farmers, higher costs of feed, and a disease that killed thousands of pigs dramatically decreased the supply of pigs in China. The price of pork has risen significantly and is being blamed in a large part for the rising inflation rate. The government has decided to release pigs from its reserves to help combat these high prices and the rapidly increasing inflation.
With these abnormally high prices for pork, you would think that there would be plenty of incentives to being raising pork or importing it from elsewhere. The problem is that the government has frozen prices and is trying to enforce those price ceilings. Essentially they are hurting the market by not allowing it to adjust itself. If they were to allow the price to rise high enough, either demand for pork would decrease because no one would want to pay that high of a price, or the supply will increase as new and existing suppliers raise more pigs to sell as the rewards will be great with the current prices.
The government needs to quit intervening and allow the supply and demand to adjust and fix themselves.


Dr. Tufte said...

-1 on Hailey for a grammatical error.

Pig reserves ???

Anyway, the problem with a price ceiling is that when it binds, it does so at a price that is too low. This creates excess demand.

Surprisingly, the government is doing a good thing (although it would be better not to have the price ceiling at all). As long as the government is keeping pigs in reserve, and is willing to honor the price ceiling (and lose taxpayer's money in the process) then this system will work.

Wyatt said...

Pig reserves sound ridiculous! What other kind of reserves could China have? I wonder what kind of cost the government incurred anticipating such an event. I would like to see a cost benefit analysis on the pig reserve.

William said...

Dr. Tufte,
I understand that this system is working, but it seems to me to be working inefficiently. It seems that they would receive more revenue and be better off if they did not have the price ceiling and instead allowed there to be a free market. It seems that everyone is worse off when the government puts in restrictions.

Dr. Tufte said...

William is right - it would be better if they didn't do this at all. Given that they are doing it though, it seems well thought out.