COVID-19: Pandemic vs. Price Controls

Unless you have been living under a rock, you have definitely heard about COVID-19, or even affected by it either directly or indirectly (e.g., through its impacts on our economy). It is taking the world by storm. How long it will last and how we will remember this bitter episode of history, only time will tell. In this article, I steer clear of discussing the actual severity of the virus itself as it demands more reliable evidence at hand before arriving at a decisive conclusion. Instead, the discussion will revolve around price controls that almost always appear palatable during such a crisis. If you have no time to go further than the first paragraph, the short answer is NO, price controls must be avoided at all cost. Goodbye.

For those who stay and persevere, we will now start digging deeper into the subject of price controls and why such practices are so perverse and disastrous to the society.

The Road to Hell is paved with Good Intentions

COVID-19’s threat to the public health can probably only be surpassed by the severe impact it has on the global and domestic political, social and economic landscapes. We have all witnessed how the current situation unravels. Panic sets in and demand for essentials rises while many productive activities in numerous good and service sectors cease. The less than perfect subtitutability of capital and labor across sectors (meaning we cannot readily shift gear and transfer resources and production facilities from other sectors into the productions of necessities such as masks, toilet papers, hand sanitizers, and other medical supplies) implies that the supply side will not be able to keep up with the dramatic jump in demand, at least not the in the short run. In a market economy, where the government has little control over private behaviour, a rapid surge in demand – that outstrips supply – naturally entails rising prices of the essentials. This should come as no surprise.

I think of my readers as good, compassionate people. So, in time of such great turmoil and mass panic, it is out of our innate good nature that we seek to help those in need, the aged, the poor, the disabled, the miserable. The acts induced by this sense of responsibility and morality ingrained within come in different shape and size and from all sorts of individuals.

People wearing mask in Yanshan

To the first- and third-world nations alike, such development is gravely detrimental to the welfare of their populations. After all, even in the wealthiest nation, not everyone commands the same level of purchasing power. In poorer countries where income gaps tend to be relatively large, the majority who stations in the lower income strata feels the adverse impact the most. The swelling prices sometimes lead to an almost instant deterioration of their livelihood as they have to substitute away from other consumables and household capitals to be able to afford essential goods and services. Often, it is further exacerbated by the fact that these people tend to be the ones without permanent employment (i.e., work in part-time, casual, contract-based employment arrangements), and therefore, global uncertainty implies that they are most likely to be displaced and unprotected against earning shocks.

To the public, such market responses to unfavourable events, be it local or global, are generally difficult to digest. After all, the market collectively is an insentient being incapable of sympathising with human losses. Consequently, people often feel the social responsibilities, the need to do something to correct the perceived injustice. But, this temptation, this motivation, this call for actions do not usually result in direct private actions. After all, most people feel that they themselves are the victims as well (or, at least within the vicinity of victimhood). As a result, what it usually leads to is a cry for governments to step in and perform drastic moves to improve the situation. Don’t get me wrong. For the most part, the people are right. The government should do something. Isn’t it one of the major reasons why we elected them in the first place? It is their duty. When crises strike, we are all Keynesians.

What should the government do then? If high prices are injustice, if they are signals of greedy businessmen taking advantage of the crisis at the expense of the public – particularly of the low-income group – then of course, a sensible move should be Price Controls (putting caps/maxima on prices), right?

The answer is No, never has been and never will be. To see exactly why, we have to first get rid of our emotional chair and move onto our thinking chair for a bit.

Hereinafter, the article proceeds on the assumption that the pandemic is a serious threat to humanity (the worst possible scenario, and even with this, price controls make no logical sense), which based on limited evidence thus far (with respect to both the amount and reliability) is still debatable. We abstract from this side of the argument. Now that it is out of the way, first, we evaluate the proposition by considering why we should take up price controls and whether the rationales are sufficient or even necessary to achieve the desired ends. As you read on, keep in mind that our objective is not really to control prices per se but to aid the less fortunate members of our society.

Why do people want to control prices?

Obvious answers (though non-exhaustive):
(i). Primarily the aim is to protect consumers, particularly the poorer households because they tend to be the ones who lack the means to protect themselves against the spread of the disease as prices of essentials (masks, long shelf life food, sanitizers, etc) shoot up
(ii). A corollary to (i): to prevent exploitation by opportunists selling the demanded products at exorbitant prices for personal gains.

Are (i) and (ii) valid arguments?

Since (ii) is a corollary, we only need to ask : “is statement (i) logically coherent? “. Let’s take some time to scrutinise this proposal. Definitely, it is based on good intentions, one might say. Making a statement as this one is primarily hinged on deontological ethics (which states that an action should be evaluated purely based on whether the action itself is right or wrong, whether the action is morally sound, regardless of the consequences). However, in tackling problems, not to mention one at a national scale, we cannot evaluate any idea without contemplating both the short-term and long-term outcomes. Having good intentions does not ensure good outcomes, and more often than not, at the state level especially, it does the exact opposite. There is a saying that the road to hell is paved with good intentions, that while the adam smith’s invisible hand in the free market will guide self-interest to serve the public’s, the invisible hand in the government will guide public interest to serve individuals’ and special groups’ (as eloquently stated by an eminent economist, Milton Friedman, in his book entitled “Free to Choose”) . So, to make an argument solely according to one’s own sense of morality is not only unacceptable but outright irresponsible.

Okay, if intentions alone do not suffice, we shall take the assessment further. Do price controls really help consumers, or at the very least, the poor as intended? No, it turns out that price controls fail in both objectives. The theories, the historical records, and the empirics have shown beyond doubt that implementing price controls has only brought about more disasters added to the ones it intended to correct. Why?

1. Producers and consumers are two-sides of the same coin

First, producers are also consumers and vice versa. As a society, we tend to distinguish between the two. Producers are often regarded as richer, more resilient and generally greedy while consumers tend to be viewed as the victims. Such thinking is self-contradictory because one must realise that every consumer is a provider, a supplier, a producer in his/her own area of expertise. The only way to reconcile such a thought process is either for every consumer to be greedy or every producer to be also a victim of his own deeds. Or, alternatively, there is one side of the society who does not work and only consumes, and the other does not consume and only works. You see the point.

Scarcity of resources and economic downturn during crises mean that to encourage/incentivise more production of what people demand, many producers and workers have to extend their work hours, expand production capacity by pouring in more investment, procuring inputs via the gradually (and sometimes rapidly) weakening supply chains due to the global economic slowdown and restrictions imposed by many governments (restricting human and physical capital/asset mobility across boarders), not to mention putting themselves at risks of contracting the disease. At time of uncertainty, the whole supply chains are taking great risk and expending much time and effort to produce, stock and deliver. Moreover, the practice of efficient supply chain management to cut cost by many sectors implies that they rely mostly on on-time delivery of inputs and thus have a small inventory/stock. While it can reduce cost, this efficient arrangement relies heavily on two conditions: (1) the whole supply chain can work seamlessly, and (2) businesses have the capacity to forecast future demand. A sudden global shock such as COVID-19 undoubtedly caused disruptions to (1) and (2).

Therefore, as recipients of their fruit of labor and capital and as workers/producers/care takers ourselves, for us to collectively impose moral responsibilities on these producers and workers, to force them to involuntarily behave as charitable organisations (by refusing to pay them at higher prices or condemning them for raising prices of goods /services in shortage) are simply inhumane. Workers who work to produce masks, hand sanitizers and medical supplies are not well-off individuals. Just like us, they are consumers who need to secure food, shelter, medicine and other necessities for themselves and their families. The business owners are risking their capital and putting their businesses in jeopardy to stay in operation. For them to be publicly prosecuted for charging higher prices in time when the costs of production and systemic risks increase, for them to be chained is tantamount to killing our own economy. By controlling the free market’s prevailing prices, we are essentially stealing from our producers and all their stakeholders (employees, investors, lenders, suppliers, etc) to give to consumers. By the public’s will, the public is killing itself. By the public’s will, the government is killing the public. Simply put, group A is trying to do good by stealing from group B to give to group C. This is not even remotely moral.

2. Restricting price movements is restricting the incentives to produce/supply

Okay, so let’s say we really do not care about producers and most consumers or even ourselves, and we place our hearts in the right place, with the poor communities across our country. We care about them and are willing to bear the losses to make sure that not a single soul has to suffer. This is a high ideal, a noble, commendable thinking, but again, it is full of fallacies.

Price controls will make the poor communities even worse off. Price controls indirectly kill both the vulnerable and the otherwise resilient members of the society. Why?

First, no businesses can run at a loss. This is the hard truth. Businesses and productive activities, by construction, can only operate when there is profit to be gained (we will dive deeper in the section about true cost below). Businesses have to build a healthy asset and cash flow position. How else can they pay their workers, lenders/banks, investors and other stakeholders? Contrary to the popular view, even large corporations do not consist of people who smoke cigar and sit on a throne of gold. If input costs increase, prices that producers of those highly demanded goods charge will go up. As explained earlier, before even trying to expand their profit margin, businesses have to charge higher prices to break even, to cover the cost of inputs and the higher risks undertaken. Moreover, when a product is in high demand, the only way to produce more with the same technology is for its supplier to hire new people and capital. As these new resources might already be occupied in other productive activities, producers will have to bid higher prices to attract these resources. So, by restricting prices from going up, we are, in a nutshell, making it impossible to businesses to produce more. Hence, fewer goods will be available for all of us, no matter our income levels.

Second, following logically from the first argument, price is a market mechanism that coordinates and incentivises production. When prices rise in one sector, more producers will enter that sector to produce and sell to reap the benefits of higher prices. As the sector grows, as more producers enter and compete, the supply of the essentials we need will increase and this will put a downward pressure on prices, allowing prices to adjust and fall back to lower levels. Of course, it will take time. Notwithstanding, let’s consider what would happen when our government prevented price of a product, say mask, from rising. Then, given the current increasing input cost, no profit could be made. Producers of masks would lose from this arrangement, could not hire workers, could not pay back debts, could not rent capital, could not pay for overheads, and on this account, the existing mask producing industry would shrink, thus reducing mask supply in the market. Nobody in their right mind would jump into a highly regulated industry that is making a loss. At this point, the entire supply chain would be cut off and fewer masks than ever would be available for our purchases.

Both the first and second arguments imply that supply will fall even further under price controls. This means that, not only are poorer communities not getting any essentials they need, now even those in the middle and high income groups are unable to buy what they need. We are making people more equal indeed, equally poor.

Empty shelves with no toilet paper (Halifax, Canada)

3. Price control entails moral hazard

Price controls, not only discourage production/supply, but they encourage perverse behaviours from consumers. If a crisis struck and prices could not go up to reflect the actual scarcity/demand within the market, people would hoard. They would begin stockpiling goods in their personal inventories as much as their purchasing power and good availability/accessibility allow. Since goods are of finite quantity, they would undoubtedly run out eventually (and rapidly) if every person went to the markets with the intention of buying as much as he/she could beyond his/her needs. The result is some people would end up with more goods than they need, some would end up with fewer and some with none at all.

By the very nature of scarcity, the rationing of goods will inevitably occur one way or another. Either it is based on a first-come-first-serve basis, a restriction on purchasable quantities per person, or through any other means. But, by artificially capping prices (e.g., criminalizing businesses for selling highly demanded goods at higher prices), prices no longer reflect demands, the market signals distorted. With constant/fixed prices, price controls tend to reward those people with higher purchasing power and those with more time (e.g., single-earner families with the husband/wife working and the wife/husband shopping as opposed to single mothers who might have to work and care for their children simultaneously). In other words, price controls are more likely to reward the richer/better off households at the expense of poorer and older households whose ability, time and/or energy permits them to purchase much fewer goods than rich households can.

At this point, it is important to understand that “Price is a natural rationing device in a market economy“, and as far as we know, the only rationing device that works to ensure an optimal allocation of economic resources. In time of crisis, higher prices (not subject to artificially imposed ceilings) imply that each individual has to spend carefully and use whatever resources in possession sparingly. For instance, if a bottle of hand sanitizer costs 50 USD, then even well-off people would make sure that they do not waste this precious product. Due to the effects on their purchasing power and their need to diversify purchases, higher prices induce people to buy only to the extent necessary and affordable, and once bought, the products would be more likely to be used with thought and care. No doubt the rich would still be able to afford more, but the majority of people would not be wasteful.

Higher prices for those goods in high demand (during time of difficulty) help discipline people, force consumers to be frugal, ensure that no one would buy excessively and thus that goods/services in demand are available for a greater majority, encourage existing producers to speed up production and incentivise new producers to jump in and start supplying to the general public. Lowering prices with force, either by the public directly or indirectly via the government, will do the reverse.

4. Price control is possible, but cost control is physically impossible

If you ignore everything said thusfar, then there is still a crucial aspect of the physical world that will remain true no matter where you look or how you feel. While the dollar sign, the price tags, can be artificially altered to suit people’s taste, no individual, no group, no government can hope to alter the true costs of production. No matter what the price tags, more production can only be made feasible with more physical assets, more time, more energy, more labor, more technological innovation, more raw materials, and so forth. All these come at a cost. The true cost of these inputs can never be made to disappear or reduced artificially via a magic wand. The cost has to be paid somehow by someone. If prices are forced to stay low, below the level dictated by the market, then someone or some group has to bear the losses, the true costs, on the others’ behalf (Most of the time, we all pay the price eventually). Either:

  1. Producers are forced to lose assets and shut down businesses, thus lay off workers and bankrupt lenders and other stakeholders involved in the entire supply chain, or
  2. Workers are exploited and forced to work more, therefore sacrificing family time, childcare time, personal health, relationship, etc., for the same amount or perhaps fewer dollars, or
  3. Assuming tax does not rise, the government is forced to cut back budgets on construction, education, military, disability care, old age care, and other public services, or
  4. You and everyone else in the economy have to pay higher taxes out of your own pocket to allow the government to subsidize productions of the goods and services needed, or
  5. The government has to increase the quantity of money (print more money in layman’s term) to subsidize the productions and thus resulting in inflation across the board, or
  6. Your country is forced to borrow from foreigners, from foreign governments and pay high interest rates (to account for risk premium and lack of loanable funds during the crisis) to produce non-productive, non-capital goods and therefore indebting your future generations, or
  7. Some filthy rich individuals (Bill Gates, Marks, Elon, Jack, Jeff, Oprah, etc) or some governments whose countries are, against all odds, exempted from the crisis, defying gravity, jump in and donate a great deal of money for the sake of your country at their own expenses, or
  8. Assuming all the above do not occur, then somehow the producers have to be able to produce at a lower cost (in a rising cost scenario!) and this usually means they will have to use cheaper/lower quality materials and thus selling lower quality products (that might just lose their intended effects completely!) at the expense of the buyers, the consumers in general (you, yes you!), or
  9. Consumers incur an additional cost known as the “Search Cost”. When prices are fixed at an artificially low level, consumers are not immune to the negative outcomes either. Not only do consumers face shortage of the goods they demand, but by the time they have found what they need, if the products/services remain available/accessible at all, they might have incurred a substantial “search cost”. In other words, instead of paying in dollar, they pay the price in terms of search time, energy, gas money and the likes that could have been used for other more productive activities.

The lesson here is that the true cost has to be paid. There is no detour, no shortcut, no helicopter money.

5. Morality

If you disregard the reasoning above and insist on making decision based on the sense of morality and justice, then consider some counter questions.

Who are we to say the producers and their employees deserve to take a loss during economic downturn so everyone else can survive? Who are we to impose our will on other people to do goods on our behalf? Who are we to tell our government to confiscate resources from the better off people (the majority of whom has worked to their utmost to get to where they are, benefiting or even enriching their employees, consumers, business partners and their communities in the process) to worse off people? If we ourselves are not willing to pay a great deal from our own pocket, then who are we to say that group A should pay for group B? Are we not just practising discrimination to fulfil our sense of morality at no expense of ours?

We live in a constrained world in which the natural state had always been poverty until not more than two centuries ago (that is the past world comprised an overwhelming majority of the population who had always been in extreme poverty with much worse living conditions than people of the present world). The world before us was highly unequal and even the richer few ‘s quality of life back then could not be compared to the living standard the current middle class enjoys. Some time in the 1800s, the movement towards liberalization of the market and opening up borders propelled human societies forward by freeing the great majority from subsistence and incentivising consecutive technological revolutions, creating a virtuous cycle. The question we should ask ourselves, in my opinion, is not why there are still poor people. The question that you should ask yourself, as one of the greatest economist, Thomas Sowell, once put it, is that “given the many constraints the natural world imposes upon us, how can there be any rich at all?” How are there so many middle-class households? How could a once poverty stricken like China and the poorly endowed countries like Japan (with little natural resources in sight) could thrive and produce so much wealth we all have come to witness?

Yes, there are some producers who exploit the situation. Yes, there are heartless people. Yes, there are crooks, psychopaths, who deserve to be buried deep underground. After all, even the heterogeneity at birth alone (at the biological level) is capable of creating a distribution of people of diverse characteristics, personalities and levels of ingenuity (both mild and extreme differences), not to mention – inter alia – the influences from parent, cultural and social constructs, education system and many other factors unaccounted for or unobservable.

However, being in a free market means that producers who do not appeal to consumers will eventually cease to exist. When consumers judge the producers to be of low quality, inefficient, low accountability and transparency, or in this case, exploitative, the punishment for these producers is the loss of trust and thus businesses. As long as we reside in a free market, there will be the next producer who is willing to sell to us at a lower price as long as it does not break his/her bank. If consumers do not like one producer, in a free market, they are free to choose other suppliers.

To resort to price controls based on a few cases of exploitation is equivalent to punishing an entire industry/community/population for crimes committed by a few of its members. At its core, such a drastic measure is not only inefficient, ineffective and detrimental to the economy, but it is completely an act of injustice and immorality. It is inhumane. It shows a severe lack of foresight.

6. Okay, but if this is a No and that is a No, then what should or can we do to help?

An important economic lesson is “DON’T MESS WITH THE MARKET PRICES”. Of course, if you are economically trained, you might bring up externalities, public goods, moral hazard, and so forth to counter the statement. I concede, but this is not the point. The point is controlling prices is not an option.

Of course, there are alternatives to price controls. For instance,

  • Fiscal policy: through stimulus packages, increasing its spending, the government can directly target those with income and/or asset position below a certain threshold (what we call ‘means-tested’ transfers). It channels financial supports either in pecuniary or non-pecuniary forms (such as food stamp and free/subsidized medical care for poorer households) directly to these households to help them buy what they need. The government can also raise spending on public projects, especially healthcare, old-age care and medical research to speed up the development of the vaccination/cure. It will do so at a cost (and whether the benefits can offset the costs is subject to a case by case analysis), that is as pointed out earlier, in part 4. It has to either raise tax, borrow more, or run inflation. Still, even the lump-sum redistribution is usually associated with substantial dead-weight loss and is conducive to long-run distortions in the markets of labor, capital (physical and financial), goods and services alike.
  • Monetary policy: the central bank can also assist by either directly slashing the short-term interest rate to ease borrowing constraints for those in need of emergency financing and those businesses and households facing insolvency due to high exposure to the current systemic risk (the pandemic). This of course assumes that there is some room to move (that is the current interest rate is high enough). If the current rate is already close to the zero lower bound, then there is little margin to cut. What the central bank can still do is to help liquidate private enterprises facing liquidity constraints and to ease the terms of debt instruments (debt restructuring), which might be able to reduce the immense downward pressure on businesses.
  • Private charitable activities: there are many people who are willing to donate and help in various ways. These are done voluntarily, without coercion from any individual/organisation. Such charitable behaviours only come at personal expense (but of course they get to feel the satisfaction from knowing that they have contributed to their society) without conflicting with the free market operation. Economists still count it as individuals serving their self-interests and hence gaining utilities.
  • Foreign donors: wealthier countries, for one reason or another (out of goodwill or for diplomatic/political/economic objectives), can provide financial aids, loans and/or medical supplies directly to poorer countries affected.
  • Preventive measures: the government can work closely with private and public entities and the public alike to minimize the spread of the virus. This again requires that we treat each scenario as unique and perform proper assessment. After all, how the situation evolves in a cold region with older demographics can be very different from the one in a hotter region with younger population. Sometimes, extreme policy responses such as requiring every individual with symptoms to visit hospitals instead of quarantining the person at home can lead to severe shortage of medical practitioners and equipment on top of speeding up the spread at the hot spots (the hospitals) if the hygienic practices are not up to standard. Bad policy responses can aggravate the panic, lead to severe economic disruption and kill quicker than the virus itself. Governments should carefully deliberate over contingent actions. Quality evidence is extracted from primary sources and peer-reviewed research, not simple statistics from obscure data, not any reports from popular media. Even from research institutions, be it private or national, their data, methodologies, findings and references should be subject to a reasonable degree of scrutiny. It is impossible to tell the truth without statistics, but it is also easy to mislead with one.
  • At a more personal level: Do not panic. We have confronted worse and pulled through, not to say that you should not take precautions. But being careful and being soaked in irrational fear are two completely different behaviours. Pay attentions to primary sources of information (if you do not have time or the expertise to go through the bulk of new research at the front-line, then put more trust in quality sources like the WHO or, you might object here, your own government-run institutions), do not trust unreliable information circulated through obscure media reports, buy what you need at reasonable amount and try your best not to hoard to make sure there is enough to go around, stay open-minded and do not prejudge/discriminate, do not share/spread information without carefully scrutinising the details (a lot of statistics/reports turned out to be false/misinformed in the end), take precautions to prevent spreading, be productive, donate if you can afford to, provide mental/emotional support to friends and family members, and the list goes.

Some of the above suggestions may come with their own deficiencies and each by itself will not be sufficient to tackle the problem. However, to the extent that the government does not put undue regulations and restrictions on the price movements, fewer bads are sure to occur.


To reiterate, the gist of this article is not to suggest that we should not help the less fortunate or that the government has no role to play in alleviating the hardship of its people. I offered some pointers but these merely serve as rough guidelines. Due to the countless heterogeneity, a solution to one country’s problem could cause harm in another. A case-by-case examination based on contemporary evidence (not speculation) is required to formulate a proper policy/regulation. There is not a single one-size-fit-all answer.

Fortunately, price controls have not been widely implemented at a large scale, albeit we can see them being planned or materialised already in some countries.

In the short-term, adaptation is certainly difficult and thus it is very likely that shortage occurs. In the long-term, however, the ability of the global supply chain to provide us with necessary goods and service will depend, to a great degree, on social and political responses to the pandemic. Letting prices work its way through the system would allow for a sustainable and efficient reallocation of factors to accommodate the new demand patterns. Inhibiting price movement, on the other hands, as we have learned from historical lessons, would bring about even worse global economic stagnation than it would be otherwise.

While economics might not be able to offer precise answers (quantitatively and qualitatively), it does perform one task extremely well. That is it tells us exactly what to avoid, and the outcome should we do otherwise is clear. Regardless of your economic/political views, left vs. right, socialist vs. capitalist, hayekian vs. keynesian, insisting on acting out price controls, despite the clear warning from numerous historical passages, will result in nothing less than a catastrophe. Good economics saves lives and bad economics kills indiscriminately.

4 thoughts

Leave a Reply