What’s in a Price?

Billy Ferguson/Fourth Estate


In the midst of the coronavirus outbreak, we have seen shortages of things like hand sanitizer and toilet paper. Although the people who are currently lining up to clean out Costco’s shelves are the visible reason why we are seeing shortages, it is important to understand the precise reason shortages occur to know how we should respond to them.

Economists say that shortages are a price phenomenon. They happen only when a product is selling for much less than what people are actually willing to pay for it. Shortages aren’t a reflection of how much of something people want, or how much of it there is. Rather, they are the difference between how much people would like to buy at the current price, and how much is being supplied at that price.

Even if lots of people want a rare item, people won’t be fighting each other in stores if the item is expensive. There is a certain price where the number of people who want to buy something is exactly in balance with how much is available. 

When people suddenly want more of something, the price needs to rise to restore that balance. This upsets people, especially in a crisis. Amazon has prevented price increases on items in high demand due to the coronavirus. This move is to protect their reputation in the face of enormous pressure from the public and the government.

When prices aren’t allowed to adjust to changes in the need for a product and its availability, consumers aren’t able to adjust their own consumption in response to those changes. Prices allow people to take into account factors that affect everyone while thinking only about their own purchases. This allows products to be more optimally distributed amongst people based on need and availability without any one person knowing how much other people need or how much is available. 

By removing the necessity to reevaluate one’s own purchases, fixing prices during a pandemic ensures a less optimal distribution of important goods. In response to an increase in the price of something like hand sanitizer, people change their consumption in all sorts of ways that we want to encourage. 

First, they try to limit how much they consume. This could mean using one pump of hand sanitizer instead of two, or not using it when it isn’t necessary. 

Second, not everyone will buy less when the price goes up. Those at a greater risk of getting the virus themselves or spreading it to others will buy more, and those who are less at risk will buy less. 

Third, people will consider substitutes to hand sanitizer. The CDC says that soap and water is more effective, so people should be making this adjustment anyway. Hand sanitizer is more portable, so it can’t be replaced by soap in every case, but when the price goes up, people decide how they want to reorganize their consumption. The ones who are out and about or who need to quickly clean their hands may continue to use hand sanitizer, while those who are using it in their own homes may switch to soap.

When prices do not change and a shortage is allowed to persist, items are distributed not on the basis of any of the pragmatic considerations above, but on the basis of luck and privilege. Some people will be lucky enough to get to the store first and clean out the shelves, while others will know someone who works at the store or can pay someone to wait in line for them. These lucky ones will then go on using the coveted product in the same way they did before, as carefully or as wastefully as they wish, without suffering any consequences.

It may be unpalatable to see high prices on things people desperately need, but that is how we can coordinate everyone’s use of those items in the most responsible way.