On toilet paper, price gouging and ventilators

One of the humorous aspects of an otherwise bleak situation is the disappearance of toilet paper from our store shelves allegedly caused by irrational hording. This has inspired jokes from six-year-olds to late-night comedians. Beyond jokes the shortage and the accompanying accusations of price gouging can serve as an illustration of how capitalism can help manage a disaster.

Hoarding in the face of disaster is a natural human response. My own freezer is stuffed right now when normally I keep a pretty bare frig. The desire to hoard when faced with uncertainty is a reality. The question is how to allocate goods.

One solution, urged by Gov. Michelle Lujan Grisham, is for stores to limit purchases to, say, two per consumer. This assumes that “one” is all that’s needed. But do we know how many children are in that household or what other needs the consumer might have? And even if this would work with toilet paper, will it work with other products subject to hoarding.

Another solution is to raise prices to discourage excessive purchases. But such gouging during a natural disaster is extremely unpopular and even illegal.

New Mexico’s attorney general has issued a statement saying price gouging is unconscionable. Even Amazon has prohibited sharp price increases.   

Most economists disagree with policies against price gouging. We argue that higher prices serve two purposes. Prices allocate goods to their best use. Those willing to pay more for toilet paper have a higher need for that toilet paper, even if the need might be based on irrational fear. Providing a sense of security is not a without value.

The second purpose of higher prices is to signal suppliers to increase production. One of the messages that comes from economics is that people respond to incentives. For producers, these incentives are in the form of profits. Higher prices make for higher profits, motivating production.

All this illustrates both the strength and weakness of the capitalist system. If we let the market work, it will allocate resources in a way that satisfies the needs of consumers. But higher price for necessities, like toilet paper, may impose a hardship on the poor, who cannot afford the higher prices.

Efficiency vs. fairness is the eternal tradeoff of capitalism. To ensure fairness, we impose laws against price gouging, but we then sacrifice a market response that provides more toilet paper.

This problem becomes more extreme when we look at issues less trivial than toilet paper. Take ventilators. There is a global shortage of ventilators. The demand has resulted in a rise in prices. Responding to market demand, CPAP manufacturers are converting their production facilities to make ventilators.

The alternative is to use government action to order manufacturers to produce needed products. Trump did this late last month, when he used the Defense Procurement Act to order General Motors to produce ventilators. According to media reports, the CPAP manufacturers, responding to market incentives, are going to produce multiples of what GM is set to produce.

Christopher A. Erickson, Ph.D., is a professor of economics at NMSU. The opinions expressed may not be shared by the regents and administration of NMSU. Contact chrerick@nmsu.edu.