The article deals with lowering of the price ceiling for three-ply face-masks in Malaysia from 1 Ringgit to 70 Sen in light of the Coronavirus pandemic in 2020. Face-masks have emerged as a major measure to limit the spread of the pandemic and are considered merit goods as consumers not only protect themselves from contracting the disease but also reduce the risk of transmission in society. As a result, this policy is aimed at increasing consumption of face-masks in Malaysia.
Figure 1.1 Market Failure in Malaysian Face-mask Market
In Figure 1.1, the socially desirable output for this market is Q2 at price P2, where the Marginal Social Benefit is equal to the Marginal Social Cost, thus maximising benefits to society. The Marginal Social Benefit is greater than the Marginal Private Benefit and there is a consequent difference between the socially desirable output at Q2 and the actual equilibrium output for the market at Q1 as a result of a positive consumption externality, creating Market Failure. Market Failure is defined as a situation when distribution of goods in the market is not allocatively efficient. There is welfare loss in the market for masks indicated by triangle abc, because it indicates loss of social benefits due to underconsumption. If the externality reduces and market failure gets corrected, triangle abc represents the benefits gained by society.
Figure 1.2 Price ceiling implemented in Malaysian Face-mask market
To correct market failure due to underconsumption of masks, the government is intervening to increase quantity demanded by lowering price through implementation of a new price ceiling at 70 sen, which is below the equilibrium price P3 as seen in Figure 1.2. Price ceiling is defined as the maximum price imposed by the government on a market, which is below the equilibrium price for that market. This is relevant to the key concept of intervention, which can be defined as involvement of the government in economic markets to ensure economic well being of stakeholders and influence their economic decision making to benefit society.
This price ceiling ensures that producers cannot raise prices above 70 sen, thus decreasing price from 1 Ringgit (old price ceiling), which causes a consequent increase in quantity demanded from Q4 to Q5 (Figure 1.2) according to the Law of Demand. This should result in correction of market failure and reduction of welfare loss. However, though the quantity demanded increases as a result of lower prices, the quantity supplied will decrease from Q2 to Q1 as per Law of Supply.
As seen in Figure 1.2, reduced prices will create a shortage DE as quantity demanded of masks is greater than quantity supplied, which is significantly larger than previous shortage BC, indicating that quantity demanded may not be met by producers. Thus market failure may not be completely corrected and the externality may be reduced, but not eliminated. Since the pandemic is severely impacting the economy, the government should intervene further to meet excess demand. This can be done by direct provision, which refers to production of goods by the government in order to increase the quantity supplied in the market, while subsequently reducing the burden on producers and increasing welfare to society.
Majority of face-masks are not reusable, and reduced prices may lead to hoarding as consumers can afford to purchase more at lower prices, causing inequitable distribution of masks in society. There may also be development of black markets where masks could be sold at higher prices than the price ceiling. However, as seen in the article, the government is also intervening to ensure that producers follow price controls through the implementation of the Price Control and Anti-Profiteering Act, which places heavy fines on producers for non-compliance, thereby reducing the possibility of black markets. Due to reduced incentives in the short term, revenue will decrease from 0Q2BP2 to 0Q1DP1 and producers may explore saving costs by offloading labour, leading to loss of jobs and thereby impacting sections of the Malaysian economy.
An alternative government intervention is provision of subsidies to producers. This helps in covering costs, thus providing incentive to lower prices and reducing market failure through the subsequent increase in consumption. However, the size of subsidy should be sufficient to cover the entire shortage DE (Figure 1.2) that is being created in order to completely correct market failure. Thus opportunity cost must be considered as the government could have allotted subsidies to areas like research and development relating to vaccination.
In conclusion, this government intervention of price ceiling is likely to effectively combat the spread of Coronavirus and correct market failure for face-masks. In the long term, it may reduce the spread of disease and prove beneficial for all stakeholders by reducing the impact of the pandemic on the Malaysian economy. The government should continue to monitor the effectiveness of this intervention and use its expertise to take additional measures if required.
Comments