Price-Gouging on Coronavirus Masks Isn’t Easy to Fix

Stephen L Carter

03 Mar 2020, 08:34 PM IST

(Bloomberg Opinion) -- Sometimes it’s better to be wrong.

Last month in this space, I predicted that should concern about the coronavirus now known as Covid-19 slide toward panic, the N95 mask — a close-fitting respirator mask that can inhibit the spread of the virus — would suddenly be in high demand. High demand would lead to higher prices, and higher prices would lead to public fury. Public fury would lead to calls for lower prices, lower prices would lead to a reduced supply, and suddenly we’d have a shortage.

Everything has unfolded exactly as I foresaw. Accusations of price-gouging are everywhere. Amazon has stopped selling versions whose prices it deems too high. “There is no place for price-gouging on Amazon,” the company says — and its solution is to offer a smaller quantity of masks, which swiftly sell out. In Connecticut, where I live and work, medical masks of all kinds are essentially unavailable.

Of course. If we let the price rise, more sellers enter the market and we have a larger supply. If we keep prices artificially low, we get hoarding and shortages. That the shortages might stem from admirable efforts to ensure fairness and equal access doesn’t make them any less shortages. And it’s due to those shortages that we’ve witnessed the pathetic spectacle of the U.S. Surgeon General pleading with the public to stop buying face masks, to leave enough for medical professionals.

Every economist understands this.

So rather than treading that well-worn ground, let’s consider another question: Might there be an alternative that can both stimulate production and meet with a little more public approbation? (Please note that in what follows, I am not suggesting that public panic is justified or will make a difference; I am dealing only with demand as it exists.)

Let me review four possibilities:

1. Let’s begin with Alex M. Azar II, Secretary of Health and Human Services, who has raised the possibility that the Trump administration might obtain more masks by implementing the Defense Production Act of 1950. The statute, a Korean War relic, allows the president to force companies to enter into contracts and ramp up production of items he deems necessary for national defense. It’s been used often, including in 1970, when the Nixon administration employed it to try to make an end-run around Congress to fund the supersonic transport project, and in 2011, when the Obama administration applied it to force telecoms to share confidential information about their networks.

But aside from time of war, the statute has never been used to force companies to manufacture on so large a scale. By implementing the act, the government would conscript manufacturers to produce as many masks as needed. (Azar estimated 300 million.) This is the worst of the many ideas that have been proposed. At the very least, it would cause potential market entrants to reconsider their plans. Why gear up to bring a product to market if the feds are going to force you to sell it to them at a price they set? (And imagine the precedent!)

And although Azar does not appear to have mentioned the fact, a decision to implement the act could transform ordinary citizens who’ve stocked up into criminals. Once the president designates a commodity as “scarce” within the meaning of the statute, people are prohibited from keeping a quantity “in excess of the reasonable demands of business, personal, or home consumption.”

So let’s scratch this idea.

2. In a 2013 article, pricing expert Rafi Mohammed suggested that we allow states to regulate prices during emergencies but also provide public subsidies to retailers. The subsidies would permit retailers to pay higher prices to producers, thereby stimulating more supply while keeping the cost to consumers steady.

Although I like this idea, I suspect that legislators would yield to the temptation to condition the money on the ability of retailers and producers to meet a variety of regulatory targets, on everything from sustainability to workforce composition. And buried deep in the fine print, almost certainly, would be a back door price control: yes, you can have the subsidy, but only if you stay within a particular guideline.

Mohammed’s proposal is attractive, but we have to imagine a clean subsidy with no significant strings attached. I’m skeptical that our politics could produce that.

3. We could sit home and scream, using social media to mob those who we think are charging too much, creating pressure for them to cut prices. This seems to have worked with the airlines after Hurricane Irma in 2017, although it’s possible the problem was less pricing than optics.

But going after airlines is easy, because they’re big targets and market entry is difficult. Mask suppliers, on the other hand, are mostly small targets, and market entry is easy. If we attack those whose prices we don’t like, the one thing we won’t do is tempt more suppliers into the market. (Also, I won’t support any proposal that will encourage mob behavior, even online.)

4. Finally, we could supply means-tested vouchers directly to the public to purchase masks and certain necessities for dealing with Covid-19, not unlike food vouchers under the SNAP program. True, we run the risk that with more money chasing the goods, prices will rise even further than they would had we not provided the money — the same phenomenon we see with college tuition subsidies.

But this might turn out to be a feature rather than a bug. Costs of entry here are relatively low, so the more prices rise, the more sellers will enter the market. And, as a matter of principle, I prefer solutions that increase the choices and buying power of the poor rather than making the choices for them.

Maybe you hate all of these ideas. Maybe you have a better one. But you’ll have to decide which goal to prioritize: keeping mask prices low or ensuring an adequate supply. Because if we focus all our energy on the first, we’ll never achieve the second.

I quite understand that many people instinctively trust government to get the ethics of distribution right, but I’m not sure the evidence supports this proposition.

To contact the editor responsible for this story: Sarah Green Carmichael at sgreencarmic@bloomberg.net

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Stephen L. Carter is a Bloomberg Opinion columnist. He is a professor of law at Yale University and was a clerk to U.S. Supreme Court Justice Thurgood Marshall. His novels include “The Emperor of Ocean Park,” and his latest nonfiction book is “Invisible: The Forgotten Story of the Black Woman Lawyer Who Took Down America's Most Powerful Mobster.”