Why face masks are more expensive now - Dhaka Tribune

This is what the price system is supposed to do

One of the most difficult questions I’ve ever had to answer was: “Why does the price of eggs rise at Easter, just when everyone wants eggs?” The straight answer is easy: “Because demand has risen.” But at the time and place I was asked, that wasn’t good enough. There are so many assumptions wrapped in that four-word response that my listeners just didn't get it.

I should explain, I was in Russia, at the time when it was still thinking of itself as the Soviet Union. I was helping to sub-edit an economics magazine and this was a question from a little old lady, a “babushka,” which one of my colleagues was trying to answer on the letters page. 

An Easter tradition there is to decorate hard-boiled eggs so, given that it was Easter, many people wanted to have more eggs than usual. Food had just been freed from price controls and so the question. But, this is just when everyone wants more eggs, so why have they put up the price? 

Those of us who have lived in a market economy for a lifetime find this terribly difficult to answer. For on the surface it’s easy -- more people want it, supply is limited, therefore, the price goes up. 

But to someone who has lived an entire existence without considering such matters, even, in the Soviet system denying the use or value of the price system itself, this is just mystifying. Of course, it’s possible to giggle a bit at the little old lady but don’t be too fast at that. 

For we’re all generally making that same mistake as we complain about price gouging now that coronavirus is a global problem. Face masks, why have they gone up in price? Sanitizing hand wash, aren’t we being cheated if this is now more expensive than it was two weeks ago?

Nope, this is what the price system is supposed to do. Demand has risen and supply in that short term is static. So, the price changes, that’s just what prices do. Further, we want them to do this.

There are an awful lot of people who would be willing to pay Tk100 for a face mask. But some people need them rather more than others. I do not, for example, need one to feed my cat. Nor to talk to my wife -- normal domesticity means that if one of us has it then the other does already. 

That nurse working in the hospital does need a mask rather more than I do. So, how are we to decide among those varied desires? Well, a higher price makes people think rather more strongly about whether they actually really need it. 

After all, we’d all like a Bentley but that they cost more than a house each does rather limit how many of us go get one. That is, higher prices are an allocation method for our now scarce goods.

But the price system miracle doesn’t stop there. The higher prices now mean that there’s a larger gap between production cost and sales price -- that is, potential profits have just soared. Which inveigles the greedy capitalists into making more of these things which are in this higher demand. 

Or even, to buy them in one place, where they are still the old price and sell them in another, where that demand and price is higher. Either way, we get more of our thing where it is most needed.

Sure, there’s that side effect that rich people get to have some just because they’re rich but there’s no perfect solution to any human problem. Asking the bureaucrats to decide who gets what will just mean bureaucrats are the first in the queue. 

Obviously, for how can scarce goods be allocated unless the bureaucrats doing the allocating get theirs first? Well, OK, that’s not strictly true in logic, but that is the way any such system always turns out.

It’s true, we might call this price gouging, and there are many places around the world which have laws against it. In the US, e-Bay has just stopped selling -- or allowing anyone to sell -- anything coronavirus related because of these laws. The risk of being prosecuted is just too high for the company to allow it. 

Which is an interesting result really, if we don’t allow a market to exist then the market will not exist. Those extra face masks remain at the back of someone’s warehouse rather than being distributed. This isn’t an end result that notably helps anyone even if it is distinctly fairer.

The harsh truth about that world out there being that sometimes efficiency just is more important than any claim of fairness we might make. We might not even like the result of the necessary trade-off but it still exists. 

We must have a method of allocating things in scare supply relative to the demand for them. Long historical experience has shown us that the price system is the best way of doing this. That is, much as it may grate, that face masks’ rise in price in the midst of a pandemic is a good thing.

Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.

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