Tag: Shortage

Sour Grapes Make the Best W ine

Future shortages will continue to plague the world in the minds of the pundit class, with the latest being The Atlantic story on the great on-coming  wine “shortage.”

Citing Morgan-Stanley research they find:

Data suggests there may be insufficient supply to meet demand in coming years, as current vintages are released.

Now here’s the punchline: the piece features four graphics showing production and consumption data and zero containing price data.

My favorite is below.  It appears that they left out the “h” in wine.

global whine
The Grapes of Wrath?

I am going to go out on a professional limb here and predict that two years from now I will be able to stroll into a Wallgreens confident that I will be able to pick up a bottle of wine on the way to dinner.

The caveat, of course, is that it might be a bit pricier.

How much pricier, you ask?

A quick eyeball on this graph suggests that the production shortfall is about 10-15% lower relative to 2010, when production and consumption were somewhat equal.  So, of the few hundred wine elasticity estimates available, let’s assume a price elasticity of demand for wine in the -0.5 and -1 range.  This implies that a$10 bottle of wine will be going for $11-$13 when the “shortage” hits.

Of course, the higher prices are likely to induce either entry or expanded production, so I somehow doubt either the shortfall or the price increases will be long lived.  And, two years from now the wine shelf will look pretty much like it looks today.

What’s somewhat discouraging is that it took me about a minute to convince myself that there is no shortage in any true sense of the term looming.  Yet, pretty much every major news outlet has picked up the story and run with it.

Well, consider this another clear arbitrage opportunity!

Price controls don’t work

Here is the latest confirmation, from Venezuela. From the NYT article:

Asked where a shopper could get milk on a day when that, too, was out of stock, a manager said with sarcasm, “At Chávez’s house.”

At the heart of the debate is PresidenHugo Chávez’s socialist-inspired government, which imposes strict price controls that are intended to make a range of foods and other goods more affordable for the poor. They are often the very products that are the hardest to find.

Long lines of the kind described in the article  were common in socialist countries. The decision making process of a consumer in an economy with chronic shortages  is very different from that of our “standard Max U.” As a consumer, you might choose your desired consumption bundle from those you can afford, only to find that some of the items in that consumption bundle are not available. Or you might find that they are not available where you thought they were, and finding out where they are available is tricky. Economist János Kornai wrote a book on the Economics of Shortage, but his book on The Socialist System has a couple of chapters on the phenomenon of shortage as well. For more on this, take next year’s Comparative Economic Systems course (here is the course outline from last year).