Readers may be surprised that an economist like me, trained after Western traditions, would say that rationing could be better than the free market. Of course, I endorse the free market under normal circumstances. But there are times when the free market does not work so well, and these exceptions go beyond the traditional “market failure” cases such as excessive monopoly power, and “external economies” and “external diseconomies” like public hygiene and pollution. In particular, when the community is shrouded in an atmosphere of fear and anxiety, when people are in a panic mode, bold government intervention may be necessary.
Today, we witness panic buying that has rendered many daily necessities no longer available on the shelves of supermarkets. With Hong Kong being open to international trade, panic buying of such goods as tissue paper, hand-washing liquids, rice and disinfectants is really quite silly. I am sure that within days, these supplies will be replenished. I do not think there is a need to intervene unless there is evidence that some unethical merchants intentionally held up supplies and sold goods otherwise in ample supply at premium prices. Usually these problems will be adequately put in check by the free market because there are other shops that are ready to sell their goods at more-reasonable prices.
I think, however, in the case of surgical masks, the case for government intervention is quite compelling. Surgical masks are in great demand today because people worry about possible novel coronavirus infection. Since many people still have to go to work and therefore use public transportation, they do need a suitable mask to protect against possible transmission of viruses in a crowded train compartment or a bus. But since the epidemic broke out, the prices of surgical masks have gone through the roof. What used to be sold at HK$50 (US$6.40) a box now fetches HK$300 or more. Many fall prey to e-commerce scams. When a store has masks for sale at a more-normal price, long lines appear, with many standing in line for hours, and with no assurance of successfully buying a pack.
Protecting citizens against fear and anxiety in such special circumstances should not affect Hong Kong’s stature as a free economy
The honorable Regina Ip Lau Suk-yee, chairperson of the New People’s Party, is in favor of regulating the sale of surgical masks. This can be done through emergency legislation to regulate the behavior of retailers or including them under the Reserve Commodities Ordinance. The government, however, has reservations about this, saying that “this could be counterproductive” because it does not address the problem of an inadequate supply.
Although it is true that there is a problem of an inadequate supply, it is also true that anxiety is driving some people into a hoarding mode. When there is panic buying, the demand will be amplified to levels that far exceed real need. As a result, people with a real need may have not masks, while others keep an excess stock. Some owners of stores with supplies, out of their market instincts, raise the retail price, and pocket a handsome profit.
It is not hard to see that in such circumstances, there will be more panic and more anxiety. People’s mental health deteriorates, rendering them even more vulnerable to diseases. It is well-known that anxiety reduces the ability of the body to fight viruses.
Macao has chosen to ration the limited supplies at cost. Residents of Macao can present their Macao identity cards at designated outlets and buy their rations every 10 days at a price of 10 masks for 8 patacas (US$1.00). Taiwan has made similar arrangements. People can present their health insurance cards and buy their rations at designated places.
By choosing rationing rather than the free market, Macao and Taiwan ensured that their respective residents can get their rations at affordable prices and thus be spared of anxiety and anguish. The government wins the trust of the people. Benefits certainly outweigh costs.
What are the costs? Perhaps the government worries that opting for rationing in this particular case would hurt Hong Kong’s reputation as the world’s freest economy? Perhaps merchants would become less eager to get hold of supplies if prices were regulated? Perhaps arrangements like those in Macao or Taiwan would hurt business interests?
These are times of exigencies, and surgical masks are just one special item the access to which the public considers a matter of life and death. Allowing the free-market price to eliminate the demand for those who cannot afford the price is cruel. Protecting citizens against fear and anxiety in such special circumstances should not affect Hong Kong’s stature as a free economy.
If there is a global shortage and global prices have gone up, Hong Kong will need to pay the higher going global prices to procure our supplies. If exports of these masks are banned and new supplies from abroad cannot be procured, the case for rationing is even more compelling.
If price regulation in these circumstances hurts business interests, think about the wider interest of the public and the longer-term interests of the businesses themselves. Giving up profits from panic-driven price premiums will earn them goodwill. In any case, Hong Kong people need to stand together at this hour.
The author is a senior research fellow at the Pan Sutong Shanghai-Hong Kong Economic Policy Research Institute.
