A Measure to Stimulate Consumption
This week the reduction of the VAT rate applicable to olive oil to 0% was announced by the Spanish government. This measure aims to encourage the consumption of olive oil and counteract the recent price increases of this product.
Factors that Drive the Price Increase
The steep increase in the price of olive oil in recent years is mainly due to an imbalance between supply and demand. Adverse climatic conditions have caused a significant decrease in the harvest of olives suitable for oil production, with a reduction of 35% in the last three years.
Cultural Preference and Elasticity of Demand
Despite the price increases, the Spanish population maintains a strong cultural preference for olive oil, demonstrating an elastic demand. This means that they are willing to pay a higher price for this product, even to the detriment of other expenses, before giving up its consumption.
The Ineffectiveness of Reducing VAT
The reduction of VAT on olive oil, although it is a stimulus measure, is considered not very effective in resolving the imbalance between supply and demand. This action will only result in an increase in the price of the product equivalent to the VAT removed.
The Function of Prices in the Market Economy
High prices act as a warning signal in the market economy, encouraging new producers to enter the market and motivating consumers to consider alternatives. This, in the long run, restores the balance between supply and demand.
Policy and Market Dynamics
Political intervention in market dynamics can have negative repercussions, as has been seen in other areas such as the housing rental market. Market laws are often more powerful than tax changes or regulations.
conclusion
Rather than reducing VAT, it would be more appropriate to allow high prices to act as a warning signal, encouraging new producers and motivating consumers to consider alternatives. Taking advantage of market dynamics as a tailwind can amplify the effects of public policies.