‘Mask Shortage’: Government Intervention vs. the Market

The “Mask Crisis”: Government Intervention vs. the Market

As the Wuhan coronavirus outbreak spreads, masks are becoming scarce. Prices have soared, and even then, buying one is like reaching for a star in the sky. At pharmacies, supermarkets, and other places that sell masks, “sold out” signs are posted almost without exception. A full-blown “mask crisis” is underway.

Once again, the government has stepped in and intervened in the market. On February 25, the government announced its so-called “measures to stabilize mask supply and demand.” It said that 90% of domestically produced masks would be supplied for domestic use, and that 50% of total output would be sold at low prices through public distribution channels such as Nonghyup Hanaro Mart and post offices—the so-called “half-price masks.” Yet even on the 27th and 28th, after this announcement, there was not the slightest sign that the “mask crisis” had ended, or even that the situation had eased.

The government’s market intervention in response to this “mask crisis” is, to borrow the words of one citizen who spent hours going from place to place only to fail to buy any, a form of “torturing people with false hope.” The government loudly advertised as doable something it cannot actually solve. There are two main reasons why this can only amount to false hope. One is that it has fallen into the trap of the “knowledge problem and intellectual arrogance,” and the other is that it excludes the market mechanism. The government’s current response to the mask crisis will become a textbook example of what happens when the government intervenes in the market.

First, consider the case of the “knowledge problem and intellectual arrogance.” One of the government’s measures is to require that “50% of domestic output be delivered to public outlets.” The problem is that the government is completely ignorant of the circumstances each producer currently faces. According to one newspaper report, one manufacturer with a daily output of 100,000 masks has signed a contract to supply 60,000 masks a day to a domestic company’s production line through this coming May. Is that producer now supposed to deliver 50,000 masks—half its output—to public outlets? Another manufacturer, in order to cope with recent instability in raw material procurement from China, has entered into a contract under which it receives raw materials free of charge and hands over half of its finished products free of charge. Is that producer also supposed to deliver 50% of its output to public outlets? And is it also to be told that only 10% of its output may be exported? These are just a few examples, but every producer faces different conditions and circumstances. The government neither knows these varied circumstances nor can it possibly know them all. And yet it acts as though it does, displaying the classic “fatal conceit” of pretending that requiring “50% of output to be delivered to public outlets” will end the mask crisis.

Second, the government’s measures exclude the market mechanism. Looking at the domestic mask supply situation, daily domestic mask output was 12.66 million on the 14th, but by the 26th it had fallen to 9.84 million, a drop of about 22% (Ministry of Food and Drug Safety). In other words, after government intervention, mask production actually declined. One of the fundamental reasons the situation has worsened in this way is precisely government intervention in the market. As demand for masks surged, production costs rose sharply due to increases in raw material prices, increases in the prices of various consumables needed on the factory floor, and overtime pay for emergency shifts required to meet exploding order volumes. Accordingly, wholesale delivery prices naturally nearly doubled as well. Consumers may have to buy masks at prices much higher than before, but it is precisely this steep rise in prices that serves as the incentive to increase supply and thus holds the key to ending the “mask crisis.”

But when the government stepped in and promised to provide “half-price masks,” some producers began saying, “Rather than sell to the government at prices that do not even cover cost and incur losses, it would be better to shut down altogether.” Even if they do not close entirely, there will likely be many producers who reduce mask production in order to limit their losses. That is why the government’s market intervention in response to the “mask crisis” can only be called a foolish policy—at a time when even increased supply would still be insufficient, it instead reduces supply.

Before long, the “mask crisis” will come to an end. Markets move toward equilibrium, and accordingly the imbalance in mask supply and demand will soon be resolved. In other words, the end of the “mask crisis” will ultimately come through the power of the market. Yet the government will probably claim that it ended because of government intervention, and many citizens will likely believe it. That is simply not true. “It is the passing of a year that makes you one year older, not eating a bowl of rice-cake soup.” We must not mistakenly think that the crisis ended because the government intervened. As we have seen, government intervention produces only adverse effects, delaying the time it takes for the market to find equilibrium and thereby prolonging the suffering of the people.

As we go through the Wuhan coronavirus outbreak, there will be many lessons for us to draw across a wide range of areas. One of them, perhaps, is how we understand “market-economy solutions vs. solutions based on government regulation and intervention.”

Hyukchul Kwon

Vice President, Center for Free Enterprise (CFE)

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Original title: ‘마스크 대란’, 정부 개입 vs. 시장

Author: Hyeok-cheol Kwon

Date: 2020-02-28

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=column&pn=9&idx=22432