Power & Market

How to Make Hand Sanitizer Reappear on Store Shelves

As grappling with COVID-19 has required rapid and difficult decisions by world leaders to protect the public, it has been easy to overlook some of the lessons basic economics can teach us about prices. I taught economics for several years, and this topic that we covered in the first few sessions of each semester comes to mind as I watch today’s events unfold.

Prices serve a far more important role than simply telling us how much cash we need to part with in order to receive a good or service. They form the backbone of the entire market system. Individual market actors deliver critical products around the world more effectively than any third party–directed effort ever could. And they can do that only because of prices.

Prices act as signals to entrepreneurs of what value society is placing on particular resources at any given time. So, if society wants more iPhones, then the prices of the inputs to make iPhones will increase, thereby allowing the raw materials required to be directed to that purpose. Industries creating products with less value to society can’t pay as much for those raw materials, and thus they don’t get them. In times of crisis, our focus shifts from studying how prices direct resources to iPhone production to the more critical function of rationing—who does and doesn’t get food, fuel, and medical supplies.

The political consensus is that prices should be prevented from fluctuating in times of crisis. Although these policies are often well intentioned, they remove the critical signals needed by those on both the supply side and the demand side to make decisions in the best interest of society.

Consider hand sanitizer, the price of which has been increasingly scrutinized during this crisis. People around the world have been hoarding it, making it difficult or impossible to find in some areas. Nervous citizens quite naturally understand the importance of this product and want to make sure they have plenty of it. With prices forced to remain low, those who can get to the stores fastest have little economic incentive to not stock up. Those who aren’t as swift (who coincidentally make up a large portion of those who would be most at risk should they contract COVID-19) are left with empty store shelves. Once hand sanitizer is out of stock, those who really need it can’t purchase it—at any price. Even if a desperate person deems fifty dollars per bottle a lower cost than the cost of contracting the virus, they have no options. Our well-intentioned anti-price-gouging policies have left them with nothing.

And because producers who might currently be supplying ethyl alcohol for other, less needed uses (such as alcoholic beverages) aren’t able to be compensated for the expense of converting their plants or abandoning their existing customers, many of them aren’t able to shift gears—even if they might like to in the name of helping society in a critical time.

The inevitable outcome is the emergence of a black market as desperate buyers and sellers attempt to skirt the rules and transact anyway. A basic supply and demand graph shows us that black market prices are higher than those the market would have arrived at. Our attorney generals then run around making criminals out of people who were attempting to serve the needs of the community, and no one wins.

If, however, we allow the price to fluctuate freely, two good things happen. Those who are able bodied and make it to the stores first will have some challenging decisions to make. When faced with hand sanitizer at twenty dollars per bottle that was previously only two dollars, they will be a lot less likely to clean the shelves out. They will be much more likely to grab only the amount their families need, thereby leaving additional supply for those who come behind them.

In addition, producers of alcoholic beverages will quickly notice that prices of hand sanitizer are rising. They will find it more profitable to supply hand sanitizer than beverages and rapidly convert their production. This increase in production will not only increase the amount of hand sanitizer available in the world, but also mitigate the rise in prices. Even enterprising suppliers who might appear to be exploiting the situation at the consumer’s expense are sending vital signals to other suppliers that they need to start ramping up production.

The phenomenon has been proven time and again over many generations, and no product or service to date has been exempt—no matter how urgent the crisis. The invisible hand is still at work. Markets provide more products than any other delivery method and the most just form of determining who gets them. In a time of crisis, instead of abandoning their most beneficial feature, perhaps we should lean on them more.

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