In response to the COVID-19 emergency, California Gov. Gavin Newsom issued orders employing the state’s anti‐​price‐​gouging law to prohibit businesses from raising prices on medical and personal protective equipment—face masks, for example—by more than 10% (plus documented cost increases) above their February 4 prices. A price increase of more than 50% (or more than 64¢ on a basic N‑95 mask selling for $1.27 in early February) is deemed “unconsciously excessive” under the law and order. The penalty for “each instance in which an item is sold or offered for sale” with a price increase above 10% constitutes a “violation” subject to a fine of up to $10,000 and/​or a year in jail, which suggests that the penalty can multiply with multiple sales. (There is no specified additional penalty for “unconsciously excessive” price gouging.)

Newsom seeks “fair” pricing by preventing sellers from “profiteering” on the sudden COVID‐​19‐​related jump in market demand for protective equipment. But, although his order can prevent profiteering, its rigid enforcement will limit the availability and distribution of critical supplies, thereby increasing the spread of the virus and causing more deaths.

Members of the governor’s and President Trump’s virus task forces have argued vociferously that personal protective equipment is essential to mitigating the virus’s spread, especially among frontline health care workers. Governors across the country have boosted demand by encouraging or ordering people to wear masks, with dire warnings of greater deaths if they do not.

Economists have long argued that price controls during normal times, to say nothing of emergencies, can be expected to incite hoarding by individuals, businesses, and governments, leaving store shelves bare. We are already seeing this in the current emergency and it is hardly a “fair” distributional outcome. Millions of masks (and bottles of hand sanitizer) are going unused in people’s stockpiles, unavailable to health care workers and others who may need them.

Economists also have argued that sudden market scarcities can be alleviated with price increases that induce buyers to curb purchases and—maybe more importantly—induce suppliers (new and old) to increase production.

Under normal market conditions, lowest‐​cost producers can be expected to dominate sales, leaving many higher‐​cost producers on the market sidelines because they can’t compete on price and cover costs. With price increases capped at no more than 10%, any increase in mask production will be limited to entrants with just slightly higher costs. However, with higher prices, production would be expected to expand more because the higher production costs of more entrants would be covered.

The only unknown issue is exactly how much equipment output would expand at ever‐​higher prices. In the immediate term, the increase might be slight to none. Time is required for existing firms to expand production and new (domestic and foreign) firms to enter the market, which means that production can be expected to increase with the timeframe.

The important takeaway: With unfettered market prices, more protective equipment will be available than otherwise, resulting in fewer infections and deaths. This means that the stringency of lockdown and social‐​distancing rules can be relaxed, which can lead to lower job and income losses. Conversely, using price‐​gouging controls to achieve so‐​called “fair” prices will give rise to more infections and more deaths than would otherwise be experienced, tempering the effectiveness of the governor’s mitigation policies.

Readings
  • “The Problem with Price Gouging Laws,” by Michael Giberson. Regulation 34(1): 48–53 (Spring 2011).
  • “The Two Moralities of Outlawing Price Gouging,” by Dwight R. Lee. Regulation 37(1): 28–31 (Spring 2014).