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Italy learns a hard lesson on face masks

Price caps are seldom a good idea.
Image: Getty Images

It takes economics students a couple of classes to understand why price caps are generally a bad idea. The Italian government has nonetheless chosen to set one for face masks — and it’s learning the lesson the hard way.

The problem with picking a price that’s artificially low is that it will cause shortages. Consumers will want to buy too many of the items, while suppliers will produce too few because of the lack of incentive. That is what’s happening in Italy after the government said surgical masks should cost 50 cents (excluding Vat).

Pharmacists say they are struggling to replenish their stocks, as foreign producers prefer to sell their goods elsewhere. Domestically, a number of Italian businesses which had reconverted their production lines to make masks now say the price is just too low to meet their costs. The government says it will compensate those pharmacists who’ve paid more for their masks than the sale price, but that won’t solve the scarcity problem.

Rome’s intentions are good. Scientists believe that face masks can help contain the spread of Covid-19, especially in places where social distancing is hard, such as on public transport. The Italian government is recommending their use, and some local authorities have made them compulsory in many settings. Letting citizens purchase face masks at a reasonable price isn’t just about being fair to the poorest citizens; it will also make the mask policy more effective, since it will boost compliance and help reduce the risk of contagion. Or at least that’s the theory.

As the Italian government has discovered, setting a maximum price must be part of a broader strategy. This is one of those occasions where the state can play a direct role. Above all, it needs to make sure there is sufficient supply from local and foreign producers. The government can then purchase these goods at their market price, and distribute them at whatever price it wishes. If it has to pay more than the price at which the masks are sold to the public, then so be it. This would also allow it to prioritise any parts of the population that it deems a priority, such as doctors, nurses or other essential workers.

Italy isn’t the only country to fix the price for face masks. South Korea and Taiwan have done it too. However, the first step for both of those governments was to increase local production or, at least, to heavily centralise distribution. Today, Taiwan can produce 17 million masks a day for a population of 24 million.

On March 5, the South Korean government announced it would purchase 80% of its national production. Italy is taking steps in this direction, but the price-cap fiasco risks delaying its efforts. Malta has followed Italy and set a price at 0.95 euros, although pharmacists there initially complained that this level was too low.

Italy’s face-mask struggles have broader economic implications in a time of pandemic. Many companies around the world are seeking state support as they struggle in a depressed economy, and politicians may be tempted to use their newfound powers to force artificially low prices. Before they do that, they’d better read the first couple of chapters of a basic economics textbook.

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COMMENTS   8

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Jip – There is no vaccinations against stupidity and no cure for idiocy.

That is why face masks should be like condoms in SA, just hand them out for free.

Setting price on masks ok!
Not setting limitations on how many each person can buy – Massive fail.

Nice article but that’s just one side of the story.

Martin Shkrel bought a pharmaceutical company that produces an HIV drug and hiked the price of one pill from 13.50$ to 750$ overnight. So yea price ceiling do have a place in society, especially when people want to profit from basics. I have no problem paying a premium for many things but medicine and medical equipment should be contained.

The buyer and the seller are willing participants in every transaction. The price is always a negotiated settlement between the buyer and seller. Even if the price is “set” and appears on the shelf, that price is still the result of a negotiated agreement, because the buyer can walk out the door, down the street, to purchase that product at the next shop at a lower price, or do without it. Price is the mechanism that brings equilibrium between supply and demand and this is the most efficient mechanism to allocate scarce resources.

The alternative to the price mechanism is Venezuelan-stye central planning of prices that lead to the implosion of supply networks and the unavailability of crucial medication.

The same person who demands a lower price from the supplier, is not willing to discount his own labour. His own labour is of higher value to himself, while the fruit of another person’s labour is not. He demands a discount on another person’s labour, while he is fighting for a higher wage for himself. The only fair mechanism is the supply and demand mechanism of the free market where a willing buyer and a willing seller meet each other at the price level.

@HackSonX – your analogy is only applicable in the highly unusual case of one single – and much needed – product only being available. As Sensei has pointed out, the market soon determines the ‘real’ price. And even if one pharmaceutical manufacturer leads with a totally unique and effective product, such is the competition in the free market that his price advantage will soon be eliminated by his competitors catching up. Central control – a la Communist style – has been proven by history not to work for the good of a country. Google list of former Communist states for confirmation.

Not difficult to make them at home. Most people, specially while on lockdown, can make their own. Creation of another black market opportunity by dear short-sighted politicians – as in SA with tobacco & alcohol.

Indeed. My 75 year old mother has made about 40 so far. Anyone can make the sewing machine ones. I think she found a pattern on the internet.

She has been using material scraps, old shirts and even an old table cloth. The only shortage was elastic as the material shops were closed, so one batch has little ribbons.

Great way to up cycle scraps etc and with some permanent marker or veld they can have expressions on them

End of comments.

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