The Importance of Pricing During the Coronavirus Outbreak – Misconceptions

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market forces

One of the results of the spread of the COVID-19 coronavirus to the United States has been a dramatic increase in the demand for a variety of products, ranging from hand sanitizer and protective masks to bottled water and toilet paper.

Another result is the understandable calls for putting public health and concern for others over exploitative profit and greed. On its surface, everyone can (and should) agree with this. But these calls become objectionable when they include criticism of any natural rise in prices for the products in high demand.

It seems cruel for prices to rise at a time when people need them to be lower than ever, and it seems just as cruel for economists to focus on defending high prices in a time of unusual scarcity.

Prices provide us with information about the current demand for an item.

Nathan Kreider

But to defend rising prices is not to argue for profits or against people in need. Prices provide valuable information and influence how people act. When prices are arbitrarily set by law (via anti-price gouging laws) instead of allowed to fluctuate naturally, that information is lost, and the incentives change to do more harm than good.

Prices provide information about an item’s value. Since value is based on each individual’s subjective preferences, it changes over time. The price, if set by the market rather than by law, will fluctuate to account for these changes in value. If people begin to value something less, they will cease buying it, requiring sellers to lower the price to maintain sales. Since demand is down, there is less of a profit opportunity for manufacturing that item, leading some manufacturers to lower production, or even to stop completely for a time.

Likewise, when people begin valuing something higher than before, they are willing to pay more for it, and will begin buying it more. This will send a signal that this item is currently more valuable, and there is profit to be made to those that have it available to sell.

Prices then provide us with information about the current demand for an item. People will then consciously (or subconsciously) act based on these prices. If the price is high, not only is there a high profit incentive to sell it, but there is also an incentive not to buy. Those who need it most are willing to pay a higher price, and those who don’t currently need it will refuse to pay such a high price. The price naturally rations the item to those who need it most.

When prices are low, that’s a sign that this item doesn’t really need to be rationed. Since the price is low, people may take the opportunity to stock up on this item, and people that want it but don’t really need it will buy it. People will also naturally be more wasteful with something that is easily replaced, but will carefully use that which is more expensive.

Times of high demand and extreme scarcity (such as the current coronavirus outbreak) are no different. The laws of reality do not suddenly take a break when they become inconvenient. People act in predictable ways during disasters, and without natural prices that account for supply and demand, people will act in ways that make things worse rather than better.

Prior to a suspected rise in scarcity, some people will begin stocking up. Some do it to make sure themselves and loved ones are prepared for the future, while others may stock up even more with the plan of selling their supply when it is in high demand.

One man in particular stocked up early by buying 17,700 bottles of hand sanitizer, and wants to sell them now at a higher price. Plenty of people are willing to pay what he asks, but Amazon cracked down on him for “price gouging”, and now he is unable to give people what they want.

Some would argue that he is putting profit above the well-being of others, and should be selling his supply at a much lower price. But they are missing the greater point.

By stocking up before there was a high demand, he (and others like him) have prepared ahead of time and have now brought a greater quantity available at present when it is most needed. He stocked up when nobody really needed it, and now has it available when it is needed. Without a profit incentive, fewer people would be supplying the higher demand and giving people what they want.

Manufacturers would also be boosting production when prices are allowed to rise in accordance with demand. One could argue that they should be doing this anyway. Manufacturers of sanitation products should be doing the moral thing and increasing supply to help those in need, profits be damned. And there is substance to that argument. But when people are in need, the priority should be to supply that need, and naturally high prices are a clear practical incentive to do that.

When prices rise, there is a built-in incentive to be less wasteful. If prices do not adjust, people will do what we clearly see them doing now. They stock up and buy out the available supply, regardless of what they actually need, and regardless of what others need.

With prices forced to remain low, people begin buying far more than they could ever need, just to be safe. But when prices are allowed to rise, people buy what they think they need, and leave the rest for others that need it more. They may buy five bottles of hand sanitizer instead of twenty, leaving fifteen available on the market.

Reminders about economic truths may seem cold and heartless, but they are quite the opposite. They are an effort to encourage a smart and practical response to a difficult time, and an attempt to stop counterproductive efforts.

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Nathan A. Kreider is the host of The Conversation, a podcast about ideas and how to spread them. He also publishes a blog and video content, including short book reviews, which can be found on his website nkreider.com. He can be contacted by email via [email protected]

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