Just Another Case of Shortages via Price Control

LvMIC:

Do politicians ever learn? Actually, don’t answer that.

For the citizens of Greece, things aren’t looking good as talks recently failed over having private investors write off their holding of the country’s debt and a hard default becomes even more imminent.  Despite all this, the Greek people can’t even find aspirin to cure their financial headaches thanks to their government.  From Bloomberg:

The 12,000 pharmacies that dot almost every street corner in Greek cities are the damaged capillaries of a complex system for getting treatment to patients. The Panhellenic Association of Pharmacists reports shortages of almost half the country’s 500 most-used medicines. Even when drugs are available, pharmacists often must foot the bill up front, or patients simply do without.
The financial crisis is brewing a “Greek tragedy” of slowing access to medical care and worsening outcomes for patients, Martin McKee, a professor of European public health at the London School of Hygiene and Tropical Medicine, wrote in an October article in The Lancet.

The reasons for the shortages are complex. One major cause is the Greek government, which sets prices for medicines. As part of an effort to cut its own costs, Greece has mandated lower drug prices in the past year. That has fed a secondary market, drug manufacturers contend, as wholesalers sell their shipments outside the country at higher prices than they can get within Greece. (my emphasis added)

As Tom DiLorenzo notes, price controls in the home of democracy date back to ancient times.  To establish a “just price” of grain (that is “just” in the eyes of politicians who enjoy playing the role of puppeteer), a cap was placed on the selling price which lead to mass shortages.  In the wake of starvation, a black market developed in spite of the threat of death upon selling grain at a price not officially approved of by bureaucrats.
Thousands of years later, history repeats itself.  In Power and Market, Rothbard explains why price controls that set a ceiling on the maximum price charged lead to shortages:

FP is the equilibrium price set by the market. Now, let us assume that the intervener imposes a maximum control price 0C, above which any sale becomes illegal. At the control price, the market is no longer cleared, and the quantity demanded exceeds the quantity supplied by the amount AB. In the ensuing shortage, consumers rush to buy goods that are not available at the price. Some must do without; others must patronize the market, revived as “black” or illegal, while paying a premium for the risk of punishment that sellers now undergo.

For an even simpler explanation, imagine yourself as a businessman selling, say, sweatshirts.  Normally, you charge $15 per sweatshirt; the market clearing price as Rothbard describes it.  For whatever reason, the government deems it necessary to make it illegal for you to charge over $10 per sweatshirt.  Demand schedules of your customers haven’t changed yet your profit incentive is limited as you can only charge $10 per sweatshirt.  Covering your initial costs becomes more difficult unless you can innovate to lower costs.  But why innovate or improve quality if your ability to profit is limited by politicians only looking to be reelected?

Medicine shortages in Greece are yet another case of the disastrous unintended consequences that develop when public officials believe themselves capable of outwitting the market process.  If politicians really wanted to help the public, they would leave the free transactions of market participants unhindered as interference only leads to distortions.