Of the many things that we have to endure during the COVID-19 pandemic, this might be the most unfortunate one. The Indian Government has capped the price of sanitisers and surgical masks. This is dangerous for more than one reason because it limits the availability of essential (and quality) products to the poor and the marginalised, perhaps the very group that such a price cap intends to help.
If the price ceiling — the highest price that can be legally charged from the consumer — is above the existing market price, it is of no consequence. If the cap is below the current MRP, sellers will be unwilling and that does not work either.
Price caps usually result in stores running out of stock on that product or sellers choose to hoard the product rather than sell it till the cap is lifted. This is expected. But economically marginalised families generally buy a single unit and in times like these, they may even be willing to pay a higher price for one sanitiser. But they find none because of the hoarding.
The directive is well-meaning but misplaced because while it stops the sellers from increasing the price of personal hygiene products like sanitisers and masks, it makes the situation such that the product might not even reach the common man who is supposed to benefit from the capping. Poor and marginalised sections face the downside of the uncertainty that such a policy generates. Part of the problem is also that a majority of well-educated readers remain unaffected by the price cap. So, the problem itself might go unnoticed and there might not be clamouring to solve it.
There are three reasons why price caps are generally detrimental. This is to do with the function of pricing.
First: The Manufacturer
Rising prices tell the manufacturer that there is an increase in demand. So more of the product needs to be manufactured. But if there is no cap on the raw materials but only on the final product, the manufacturer is in a fix, if not unwilling.
Second: The Consumers
Rising prices tell the consumer to use the sanitisers economically. But when there are high demand and a price cap, those who can afford the product, tend to hoard it while it is still available. It also means subsidising sanitisers for those with access. And they think, why not use more and be safe since it is cheap and available (and we have hoarded enough)?
Finally: The Entrepreneur
A rising or high price tells entrepreneurs (and price-gougers) that they can make money from this product in this market. Price-gouging is a phenomenon which occurs when a seller increases the price of goods or services much higher than is considered reasonable. It is a common concern in the US and Australia.
Unfortunately, mandating ceiling prices is not the solution to this problem. In fact, it means that people who have access (mostly the well-to-do) can buy in bulk and store. Marginalised individuals who don’t have as much access to amenities will have to go to far-off stores, or as is often the case, pay over-and-above the fixed price.
So, imposing a price-cap is not without costs.
With a limit on the price, individuals or stores may choose to hoard the product till the time they can increase the prices and get maximum benefit. This is more likely in places where there are fewer stores and as a result, poorer sections of the society often suffer. It is either that or stores losing interest in getting new stock (after the first batch sells out) of a product that has a cloud of uncertainty over it in terms of pricing. Yes, uncertainty.
Once the government — which knows little, if anything, about manufacturing sanitizer — gets in the business of setting prices, there is no guarantee that the selling price will not be brought down further. So, given the uncertainty, even if a store can source sanitisers at a higher-than-normal’ price, they will wait until the storm passes.
Creating an environment where entrepreneurs and producers can sell a product at the price consumers are willing to pay, fosters competition. This lowers prices as suppliers compete with each other. In addition, freer markets generally allocate resources efficiently.
There is a lot the government needs to do to mitigate the impact of COVID-19 as the situation gets more chaotic. Tinkering with prices is not one of them.
The author teaches Economics at St. Joseph’s College (Autonomous), Bangalore