Once again, for the non-economists

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Quico has asked me to clarify the logic through which indirect subsidies work as gifts.

Suppose you own an apartment that is worth 200 thousand dollars. Suppose you sell this apartment to your newlywed son and his wife for 150 thousand. Suppose they go out and sell this apartment and make a quick 50 thousand dollars. If instead of selling the apartment to your son you had sold it on your own for 200 grand and given 50 grand to your son, you would have both been left with the same amounts: your $150K and your son’s $50K. Under-selling is therefore a gift, a gift worth the price of the difference.

Now, substitue “you” for PDVSA, and substitute “the apartment” for “a lot of gasoline.” Finally, substitue “your son” for “the rich.” I’m sure you get the picture.

You can play this game substituting “PDVSA” for “CADIVI” and “gasoline” for “dollars.”

Now, the key to quantifying this subsidy is knowing what the market price of the good is. In the case of gasoline in Venezuela, it’s almost impossible to tell since the price is controlled and has been forever. However, a brilliant friend of mine figured out that there was one instance where the real price of gasoline revealed itself: in the paro petrolero, the black market price for gas was in effect the “real” price of gasoline, since getting gas from other sources implied looooong lines and was, in some days, close to impossible. If I recall correctly, the price was five or six times the regulated price. I thought that was a nifty idea.

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