Because of coronavirus-related shortages, dentists in the U.K. have been told they cannot order more than 100 face masks a day. At the same time, soaring mask prices were called “naked profiteering” by a British Dental Association representative.
Those prices could be the solution rather than the problem.
Face Mask Supply
The World Health Organization reported that face mask demand is up by a multiple of 100 and prices, by 20. At 20 million, the number of face masks China can produce each day needs to double. Correspondingly, a Bloomberg Opinion writer reported on January 31 that CVS, Lowe’s, Staples, and even Amazon had sold out of CDC recommended N95 air filtration face masks.
Elsewhere, in Hong Kong, panic buying provoked a mixed reaction. While prices for masks were way up, some pharmacies were distributing them for free. One “citizens group” even secured financing and bought a mask making machine. Hoping to increase their capacity, they want to sell a cheap mask.
The response in Laos was a ceiling on mask prices. The government said price hikes were illegal and sellers would be monitored. Asked about production, they “encouraged” manufacturers to boost supply.
Around the world, the supply chain is stressed.
At one factory in France, orders skyrocketed to half a billion (from 170 million a year) during the beginning of February. They hope to hire more employees and produce 24/7. In Kenya, with prices up from $2 to $10 for a 50-pak box, a mask maker began a 6-day, round the clock workweek. After running out of cotton, they flew it in from Turkey. In China, factories are prohibited from exporting the face masks they produce. Not enough, China’s supply is being supplemented with imports. One of the few face mask manufacturers in the U.S. said, “Last week I sent over a million masks to China. That’s one thing I never predicted, that I’d be sending masks to China.”
Our Bottom Line: Surge Pricing
It all reminds me of why Uber needs surge pricing. Yes, people have been exceedingly upset with higher prices on New Year’s Eve or during a snow storm. But it’s the prices that attract the drivers precisely when they might have decided to stay home. We just need to remember the Law of Supply. Our supply curve slopes upward because when price rises, producers are willing and able to provide a higher quantity.
With face masks also, price is an incentive. Below, on this face mask graph, you can see an increase in demand. Then, responding to a higher price, the quantity supplied surges:
Most economists would approve of higher face mask prices. Instead of gouging or “naked profiteering,” they see an incentive that leads to more masks. We could even say it’s the invisible hand giving manufacturers a big nudge.
But when is that nudge a devastating shove that we do not want?
My sources and more: This Bloomberg Opinion column explains why higher prices increase supply. (Be wary of its inaccurate economic terms.) Then, for much more detail, I suggest the NY Times, Quartz, the Star, the BBC, and Reuters.
Please note that I added the last sentence after seeing profoundly disturbing gouging.
Hi, I’m a 2nd year student of econometrics and my paper this semester is on this topic. I had a theory and wondered your genius opinion based on this article, if you have the time of course.
I was considering a command-and-control system overlaid with forced supply increases and supply split into hospitals on one axis and public on another axis. Then I want to put a price floor in as well as a price ceiling. As far as I can tell marginal benefit can be kept with a distribution change (Schlee, E. 2008, p. 148) but the price ceiling would eliminate this, however, it would absorb external costs (Vogel, R.J 2004, p. 1132).
For the life of me I cannot work out how to diagram this and if it would work like my brain is saying… I heard your knowledge is immense and had hoped you could guide me if you had the chance.
Thank you so much
You brought up a great point about how the supply chains for masks are stressing throughout the world. However, we can’t just stop wearing masks. Maybe we can get more efficient ones that last longer so the demand goes down a bit.