Economics International

Price Controls on Essentials During the Pandemic

The phrase “time of crisis and shortage” is certainly applicable to the coronavirus pandemic; it refers to a period of difficulty where specific items cannot be obtained in sufficient amounts due to shortages in quantity supplied. This may encourage societal inequalities.  For example, in order to prevent a future lack of essential goods, higher income earners are better placed to “hoard” such goods, as the cost of such items represent a lower percentage of their incomes when compared to lower income earners.

As coronavirus caused many consumers to stockpile on toilet rolls, the biggest paper manufacturer in the UK (suppliers for Andrex® and Kleenex®) reacted to panic-buying by informing the country that it can supply over 3.5 million rolls a day and the public “ought not to panic-buy”. They stated: “lorries are delivering across the country so new stock arrives regularly”. Producing over 1.2 billion rolls annually, the manufacturer assured everybody, “there is enough to go round”.

Nevertheless, governments should consider policy options at their disposal that would alleviate any impacts to society and consumer welfare.

Price or quantity controls are an economic tool which have occurred throughout history (often at war times) where governments may employ controls such as rationing goods. Price controls also occur as rent controls: for instance, New York City’s current rent control program (1943-present) limits rental prices. It is debatable whether price controls are an appropriate solution in the face of shortages and high prices.

The economic effect of price controls on toilet paper is highlighted in Figure 1.  Fear of future price rises and shortages has increased demand, shifting the demand curve right. This leads to excess demand at the original equilibrium price, which producers respond to by increasing quantity supplied and raising prices, causing the price to increase from P1 to P2.  Therefore, when the price of an essential commodity is left to find its own level, the price will increase and may become unaffordable for those with lower incomes.

Governments are aware that the price elasticity of essential goods is less than one (inelastic demand) which allows producers to increase prices while increasing revenue. In extreme cases, this may present retailers with an opportunity to short-term profit maximise through selling at exorbitant prices (price gouging).

In response, governments could fix the market price through price controls. However, the implementation of a price control at the pre-coronavirus equilibrium level of P1 infers an excess demand (AB) that will lead to shortages and an allocatively inefficient outcome. Therefore, controlling the price of toilet paper fails to fulfil the rationing function of the market mechanism; governmental interventionists would need to explore other means to reduce inequalities to ensure an even distribution of purchases of essential goods during panics. 

Furthermore, a black market may develop for those who do not get the product at the controlled price. The black market price would be the price at which the quantity demanded is equal to the quantity supplied at the controlled price. This black-market price is not only higher than the controlled price, but may also be higher than what the market price would be in the absence of the government price ceiling due the monopolistic power of black market vendors. Black markets also facilitate criminal activities and corruption, which represent a large external cost to society.

During the pandemic, the government recognised the dangers of price surges, intervening in the market by suggesting that retailers prevent consumers from purchasing unreasonable quantities of essential goods (rationing), which resulted in supermarkets deploying security guards overseeing toilet paper sales.   

Perhaps, governments should explore other tools to ensure a fairer distribution of toilet paper and other essential goods. Firstly, it is interesting that coronavirus has had a smaller impact on manufacturers of toilet paper. The price of raw materials remained mostly unaffected, although labour costs may have risen due to infection amongst factory workers. However, ensuring toilet paper is available at supermarkets for purchase requires multiple organisations to be involved which is potentially problematic. The entire existing supply chain for toilet paper (post-manufacture) involves multiple types of transport, intermediaries such as wholesalers, and finally large retailers such as supermarkets. Accordingly, governments could introduce non-price-based controls that ensure supply chains are kept open, removing the operational constraints faced by agents involved in the supply of essential goods.

The demand side also should not be neglected. Governments should and have (through income-protecting furlough schemes) ensured that household incomes remain stable, maintaining the affordability of essential goods, although this may lead to high prices in the long run.

Covid-19 has been a severe shock with global economic impacts. At the beginning of the pandemic, we witnessed empty supermarket shelves as consumers rushed to stock up on essential goods in the face of uncertainty. In these extreme scenarios, price gouging can occur in the face of scarcity and excess demand for goods.  Governments should seek to intervene to prevent such occurrences to reduce inequality and enhance social well-being.  However, the introduction of price-based controls alone is a blunt approach, likely to cause shortages and give rise to sub-optimal societal welfare.  Non-priced based controls, although being more complex to introduce, are less likely to distort market prices and cause shortages of essential goods.

Photo by Anna Shvets on Pexels.com is licensed under CC BY 2.0

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