Puerto Rico could learn from the perils of price controls that lead to shortages such as masks to protect against the Coronavirus

Puerto Rico should eliminate the inventory tax as this discourages companies from being more prepared, which discourages them from keeping more emergency supplies in stock, especially since many supplies cannot easily be trucked in, such as can be done in the states.

Secondly, Puerto Rico should eliminate price control laws.  The best way to get more supplies to people in need is to allow the free market to operate freely.

The article below demonstrates real life negative consequences from having price controls.


Sold-Out Coronavirus N95 Face Masks Offer a Lesson in Price Gouging

The best way to make sure supply meets demand is to let sellers charge higher prices.

Winter’s hottest trend.
Winter’s hottest trend.Photographer: Bloomberg


Now that the government has confirmed the first human-to-human transmission of the new coronavirus in the U.S., a lot of people will be rushing out to purchase masks. That would be, specifically, the N95 air filtration mask, the one recommended by the U.S. Centers for Disease Control and Prevention for blocking most airborne viruses.

Oops. Too late.

CVS is sold out. So are Lowe’s and Staples and everywhere else I’ve checked — even Amazon. No matter how health authorities try to assure the public that a pandemic is unlikely, the creeping panic continues to creep a little faster each week. And no matter how many experts query whether the N95 mask would even stop transmission of the virus, supply still can’t keep up with demand.

What to do?

Let’s begin with a thought experiment: Suppose that an entrepreneur — we’ll call him Carter — turns out to have stockpiled several thousand N95 masks a few years ago. Now, noticing the shortage, Carter opens up his storehouse and announces that he will sell N95s, in lots of 20 (as they’re commonly purchased), to the highest bidder. He even sets up a website where people can bid. Every ten minutes, until the supply is gone, the highest bidder wins 20 masks. Bids quickly run into the thousands of dollars for a package that, before the panic, could often be had for less than twenty bucks.

What happens next is of course predictable.

The outraged news media declares a scandal, the outraged Twitterverse tries to cancel poor Carter, and the outraged politicians stumble all over each other on their way to the nearest camera to charge him with price-gouging. Carter is hauled before the country as an example of how not to behave in a crisis. Greed run rampant. An immoral effort to profit from people’s fear.

You can write the script.

Carter caves. Humiliated, and worried about his business prospects, he donates his entire store of N95 masks to public health authorities, who in turn will give them out if deemed necessary (that is, if deemed necessary in their view) according to some rationing formula that will be shared with the public only if what the authorities deem to be an emergency should arise. (In China, masks are already being rationed by the government.)

But this is a dreadful result.

Here’s the simplest reason: Smarter, who happens to possess an even bigger cache of N95 masks than Carter did, will observe how he was treated and decide to keep hers under lock and key. After all, she might need them in an emergency. As a result of the insistence that Carter not sell his property at the price the market is willing to pay, the supply of N95 masks to the public is smaller than if nobody had intervened.

College students learn in Economics 101 that a demand curve slopes downward to the right. As demand falls, price falls. As demand rises, price rises. If instead you don’t allow the price to rise — because of your concern about “price gouging” — the quantity offered for sale will fall.

This isn’t complicated, and it’s true in every disaster. I’m willing to pay a lot more for a generator when I know the power is going to be out for a week than I am when the lights are on. If the price is unregulated, the difference in what I would pay in those two situations will bring more generators to market. And depending on the cost to enter the market, the rising price will lead more sellers to bring generators to the disaster site, leading to a larger supply, and eventually a lower price.

What I’ve just offered is the argument offered by most economists and most libertarians (and, certainly, by all libertarian economists) about why bans on so-called price-gouging are a bad idea.

To be sure, there are counter-arguments. At their heart lies the notion that if a demand spike is caused by an unanticipated emergency, allowing sellers to significantly raise prices in response will undercut the morally imperative distributional principle of equal access to necessities. If ten people with the same fatal illness need the two available doses of a life-saving drug, the argument runs, it’s immoral to award the drug to the highest bidders.

This intuitively appealing distributional argument helps explain why anti-price-gouging statutes are both widely supported and strictly enforced.  But as with every regulatory regime, it’s important that we consider the cost. Suppose that our concern about equity in distributing the life-saving drug leads us to forbid the producer to raise prices. In that case, unless the government forces production at gunpoint, we’re going to get less of the drug (or the generators or the masks): the very thing we say we want.  Certainly we can decide to make that tradeoff. But let’s not pretend there’s no tradeoff to be made.

* * * * * * *

Coda:  Whenever I make this argument, whether in the classroom or in print, I’m accused of celebrating the morality of profit over all else. I’m doing no such thing. I’m simply insisting that we not pretend that the solution to a shortage is to insist that producers keep prices low.

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

To contact the author of this story:
Stephen L. Carter at scarter01@bloomberg.net

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

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