Tags: Coronavirus | Trump Administration | free market | mask | ventilator | shortage | coronavirus

How the Free Market Solved the Mask and Ventilator Shortage

How the Free Market Solved the Mask and Ventilator Shortage

 Darren4155 | Dreamstime.com

By Tuesday, 21 April 2020 01:38 PM Current | Bio | Archive

Once the Coronavirus became a pandemic, there was potentially steep shortages of ventilators, surgical masks and Personal Protective Equipment (PPE). For the vast majority of countries with universal healthcare, no solution to resolve the shortage was forthcoming.

But in the US, which is the only industrialized country in the world without universal, government controlled healthcare, the potential shortage never materialized.

In addition, therapeutics and vaccines are needed quickly. The therapeutics are needed immediately to help cure those with the disease, while the vaccines are needed to prevent a re-occurrence of the virus in the fall. Both of those are mostly coming from profit motivated companies in the US.

These actions show why a market based healthcare system will always respond more quickly to serious health care issues. Countries with government run healthcare will always be slower to respond and are likely to develop products that are of lower quality while often being more costly.

The reason is simply because of the profit motive.

It is easy to see why this happens and why it is important to not control prices. The many price gouging laws in the US actually do more harm than good. Let’s see how this works.

Suppose there is a company that produces surgical masks. Prior to the outbreak of the Coronavirus, the company was producing 100 masks per day. They profitably sold the masks for $1. At that price there were 100 people per day who wanted to purchase the masks. The market was in balance, which means the market was in equilibrium.

Then, all of the sudden, the virus breaks out. Now 500 people show up each day to purchase the 100 masks. The company must decide which 100 people to sell the masks to. They could simply choose the first 100 to arrive at the company’s door each day. That means turning away the remaining 400late arrivers.

Since the company is primarily motivated by profit (all companies are primarily motivated by profit and that’s a good thing), the company decides to raise the price. As the price increases some buyers refuse to pay the higher price and leave. The company continues to raise the price until enough people have left so that only 100 remain.

Let’s say the price goes up to $5. At that price, with the new demand bought about by the virus, the market is in balance. At a price of $5, the company is producing 100 masks and those in the market purchase 100 masks.

The market, however, has a severe problem in that there are not enough masks being produced to meet the initial demand of 500 per day. The market needs more masks quickly.

In a government run, single payer healthcare system, all company prices and profits are regulated. The government would not allow the price of masks to go much above the $1 original price. In that case the government would have to force companies to produce masks. The companies would complain. For existing companies to add a second or third shift or for new companies to enter the market, the price of the mask would have to increase.

That’s because it is more costly to produce on the second and third shifts and the new companies will have higher manufacturing costs because they are new to the market. Progress to resolve the mask shortage would be slow. Months may go by before there is adequate supply.

Instead, in the US, we allowed the price mechanism in the free market to quickly solve the problem. Because the price increased to $5 for a mask that could be profitably produced and sold for $1, new firms, motivated by profit, quickly enter the market to produce masks. That increases the supply and the shortage disappears.

A company that makes pillows, for instance, found it was relatively easy to shift manufacturing from pillows to masks. And if the market price is $5 for a mask that could be profitably sold for $1, the profit potential is huge, which draws companies quickly into the market.

The result is millions of new masks being produced, so there is no longer a shortage and with the increased supply, the price begins to fall. The price will eventually end up at or just above the initial $1. The shortage disappeared in a matter of a couple of weeks.

Similarly it is the huge profit potential that has motivated dozens of companies to develop new therapeutics and new vaccines. Both will be available to the market in record times.

While we, as Americans are compassionate and would like to see all Americans receive healthcare, a single payer government system is the wrong way to go. Removing the profit motive and eliminating competition always results in higher prices, lower quality, slower innovation and a bureaucracy that is counter-productive.

Let’s keep saying no to programs like Medicare for all. More market based solutions will always yield better outcomes.

Dr. Michael Busler, Ph.D., is a public policy analyst and a professor of finance at Stockton University in Galloway, New Jersey, where he teaches undergraduate and graduate courses in finance and economics. He has written op-ed columns in major newspapers for more than 35 years.

 

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DrMichaelBuslerPhD
Once the Coronavirus became a pandemic, there was potentially steep shortages of ventilators, surgical masks and Personal Protective Equipment (PPE). For the vast majority of countries with universal healthcare, no solution to resolve the shortage was forthcoming.
free market, mask, ventilator, shortage, coronavirus
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2020-38-21
Tuesday, 21 April 2020 01:38 PM
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