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REACHING EQUILIBRIUM

The scramble for masks amid the coronavirus outbreak is a crash course in Econ 101

AP/Kin Cheung
Mask mania.
  • Mary Hui
By Mary Hui

Reporter

Hong Kong

Across China and in Hong Kong, but also as far afield as San Francisco and Rome, stores shelves have been swept clean of face masks amid surging demand. This has given rise to a simple question, but no easy answers: how to address the mask shortage so that those who need them can get them?

One approach, offered by most economists, is to let market forces do the work. This means allowing sellers to charge higher prices in response to surging demand. Basic economic theory posits that when demand outstrips supply, producers tend to raise prices. Those who can and want to pay the higher price—for example, people at the highest risk of exposure or transmission—get their hands on the scarce masks. Prices rise until a new equilibrium is reached—that is, when demand again matches supply.

In Hong Kong, that means prices for much sought-after masks have skyrocketed. Last week, one store priced a box of N95 respirator masks at HK$700 ($90) for a box of 20. Two days later, the price had gone up one-and-a-half times: a box of 50 masks now cost HK$2,500 ($321). Online, prices have soared, too.

The thought of profiting off people’s very real fears of an epidemic may be off-putting, and governments and businesses understandably try to stop this kind of dramatic price increase. In China, authorities threatened severe punishments against sellers found guilty of price gouging. Chinese e-commerce platforms like Taobao and JD.com ordered its sellers not to hike prices. Similarly, Hong Kong’s consumer watchdog urged stores not to increase their prices, and South Korea said it would punish sellers who hike prices and “disturb” the market. One drugstore in Beijing has already been fined 3 million yuan ($434,530) for hiking the price of masks by almost six times.

But whether putting a cap on prices achieves its intended effect of allocating masks more effectively and fairly is another matter. Many economists think banning price gouging distorts the market and makes it harder for people to access much-needed supplies.

The argument is that artificially suppressing prices incentivizes people to hoard products when they can get it, worsening the shortages. The hoarders can then re-sell their wares at a significant mark-up, thereby doing the exact thing that the anti-price-gouging rules tried to stamp out. Plus, by diverting these masks to the underground market, the hoarders increase the search costs of purchasing masks, as buyers will now have to spend time figuring out where the goods have gone. In effect, people who need the masks most now face greater difficulty even locating the masks.

So if the efficacy of price controls is debatable, what are some better ways to address the mask shortage? Increasing supply is an obvious one, though it takes time for supply to catch up with an upsurge in demand. In China, mask manufacturers have re-opened factories that were closed for the holidays, enticing laborers with higher wages to sacrifice vacation time and work extended hours. Factories in South Korea and Turkey also kicked into high gear to fill orders from China, with South Korea even easing working hour limits so as to ramp up production.

Making public information about the availability of masks would help, too, by allaying fears of shortages and dissuading people of the need to hoard supplies in the near term. Macau’s health bureau, for example, has set up a webpage with updates every 15 minutes of the number of masks available at different pharmacies. They’ve also effectively been rationing masks (link in Chinese), allowing anyone with a valid identity card to purchase a box of 10 masks every 10 days. Taiwan has done the same, rationing out two masks per person per week in addition to instituting a one-month ban on the export of medical masks in order to safeguard its own supplies and easing import restrictions. In this instance, rationing prevents a run on masks, and if supplies are severely limited, the government can decide to only hand out masks to the most vulnerable and exposed members of the population.

So far, the Hong Kong government doesn’t appear to have done much to address the city’s severe mask shortage beyond putting out tendering notices, procuring some masks from abroad, and asking China for permission to import masks from the mainland. Masks were among a list of “sensitive items” that Chinese customs officials blocked from being shipped to Hong Kong during the city’s months of protests.

As Hong Kongers grow increasingly dissatisfied with the government’s handling of the coronavirus outbreak—only 11% of the public think authorities have done enough, according to polling—many see the continued mask shortage as a sign that officials can’t seem to solve even the most basic problems in an evolving public health crisis.

When chief executive Carrie Lam addressed the press yesterday, she pointedly did so without wearing a mask—a marked change from her previous appearance, when she donned one publicly for the first time since the outbreak. When asked why she wasn’t a wearing a mask, Lam said she was conserving supplies and that she had banned other government officials from wearing masks unless they are sick, going to crowded places, or visiting high-risk groups.

Lam’s latest comments about masks didn’t inspire much confidence among the public. As one commentator noted (link in Chinese), it’s one thing for Lam to have a ready supply of masks and choose not to wear one, and another for regular citizens to not be able to wear a mask because they can’t get their hands on one.

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