Mises Wire

Price Controls Mean Shortages, Even during Pandemics

The COVID-19 pandemic has impacted the lives of billions and has put many Americans and others around the globe in compromised financial situations. As the COVID-19 virus (also known as the coronavirus) has continued to spread, this has led to feelings of anxiety, panic, acrimony, and uncertainty for a lot of Americans, even leading to altercations in stores due to the shortages of hand sanitizer, toilet paper, disinfectants, etc. In keeping with the laws of supply and demand, the exponential demand for the aforementioned products, mainly hand sanitizer, led to price hikes by some retailers and sold-out inventory because of individuals and companies purchasing in bulk in order to resell. There were common consumers who rushed in droves just to purchase hand sanitizer for themselves and their families. The strong demand for hand sanitizer caused so much volatility in the economy that retailers began charging up to $80 for forty ounces of hand sanitizer. Governor Cuomo has announced that in New York State the state government will crack down on retailers and punish them with fines and possible incarceration for “price gouging” in the midst of the coronavirus. New York City has already issued 550 violations equaling $275,000 for the rise in pricing of face masks, disinfectant wipes, and hand sanitizerIn the state of New Jersey, eighty stores have been warned to “stop price gouging” or face $10,000 in fines.

The Disastrous Effects of Price Controls

This strategy is likely to lead to disaster. Whenever the government intervenes in the market and manipulates pricing for the sake of affordability, this leads to a shortage of products that deprives a large number of consumers of the requested goods or services. There are numerous examples of price controls and their disastrous results, such the 1793 famine in France due to the shortage of bread and rent control in Egypt, which led to distressed and dilapidated buildings with generational tenancies mandated by the Egyptian government. In the latter case, there was no incentive to renovate, because landlords couldn’t afford to, thanks to stagnant rents. Additionally, in San Francisco in 2001, three-quarters of rent-controlled buildings were more than fifty years old, while in England and Wales privately built rental housing decreased from 61 percent of all housing in 1947 to just 14 percent in 1977. Another example of price control is the US gasoline shortage during the 1970s, when the Organization of Petroleum Exporting Countries (OPEC) imposed an oil embargo, which led to a decreased output of oil to the United States, which in turn led to a shortage of another commodity, time. In this case, though filling stations had been open for 110 hours a week on average in September 1978, during the shortage, in June 1979, they were decreased to 27 a week! There are other examples of price controls specifically pertaining to shortages, but to extrapolate from these examples, price controls lessen the producer or retailer’s incentive to please the consumer, since their business is compromised due to government manipulation of their prices.

Pandemics Don’t Abolish the Need for Market Pricing

In the case of COVID-19, since retailers aren’t allowed to “price gouge,” this had to lead to immense shortages of hand sanitizer, especially throughout the the tristate area (New Jersey, New York, and Connecticut). I personally went to five different pharmacies, including a Wal-Mart, yesterday and they all stated that hand sanitizer hasn’t been in stock in the past week. In this case, governmental manipulation of hand sanitizer prices has not benefited the masses, since there is a lack of availability of these products in the midst of a globally alarming pandemic.

In an unhampered market, of course, as the demand increases for a product, the price of the supply increases. But there’s an upside for the consumer here: when the price of a good goes up, the quantity supplied goes up as suppliers attempt to meet demand at the higher price. In any case, the price of a product is dictated by the consumer. Sellers can try to sell products at far higher prices, but if the eighty-dollar price for a bottle of sanitizer is too high, then the retailer would either have to lower the price or incur losses for merchandise that isn’t moving. Also, if Retailer A wants to charge eighty dollars for hand sanitizer, this creates an opportunity for competitors to charge less. In this case, the retailer does not suffer from government-imposed fines, but from consumers who abandon it to purchase from lower-priced ones. Manufacturers will redirect production to the most profitable and in-demand products, in this case hand sanitizer.

Whether it’s the coronavirus, the swine flu, the bird flu, Ebola, or any pandemic, we need to understand that the laws of economics still prevail and that governments have never been able to create more goods and services through price controls and other regulations. In fact, such measures lead to shortages and deprivation.

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