Price Gouging Could Actually Fix Our Face Mask Shortage

If we don’t let prices for essential goods rise, we can’t incentivize making more of them

Russ Roberts
Marker

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Photo: Visuals/Unsplash

The fear produced by Covid-19 has created unexpected shortages in our lives, from toilet paper at home to masks for health care workers.

Nobel laureate Joseph Stiglitz argued that this is a market failure—that markets work poorly in a crisis:

No country in times of serious war turns to markets. We don’t use markets to allocate how our troops should be deployed, and we didn’t rely on markets for producing tanks, airplanes, and other essential matériel in World War II. We needed immediate action, with complex coordination and changing demands; markets just don’t work well in these circumstances.

Stiglitz is right that we don’t use markets to fight physical wars. Or as one governor put it, during WWII, each state didn’t buy its own aircraft carriers.

But the pandemic is a different kind of war. As I write this on April 30, New York has about 300,000 cases of Covid-19, California has 50,000, and Wyoming is under 1,000. Masks and ventilators aren’t like aircraft carriers. Each state’s health care personnel need their own masks and ventilators, in radically different quantities.

So why aren’t there enough medical-grade masks to go around? Normally, when they’re running low, hospitals call their medical supply distributor. But right now, that supplier is getting calls from hospitals all over the country, and the manufacturers who supply the distributors with masks are also running low.

What usually happens when masks are in short supply is that prices start to rise as buyers compete for the masks that are still available. The higher price encourages the manufacturer to add a night shift. Hire more workers. Work the existing shifts more intensely. If prices rise enough, companies that make other things may find it profitable to start making masks. The higher prices encourage hospitals that don’t need masks — the ones in Wyoming, say — to not hoard them, leaving them free to go to New York. Buyers of masks pay a premium, but there are a lot more to go around.

Markets are failing in America because…

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Russ Roberts
Marker

I host the weekly podcast, EconTalk and I'm the co-creator of the Keynes-Hayek rap videos. My latest book is How Adam Smith Can Change Your Life.