Question

Use the concept of externalities to explain why if left to private decisions, the usage of face masks to prevent the transmission of COVD-19 is likely to be inefficiently low.

Answer 1

An externality in any market takes place, when people other than those which are part of a transaction get impacted by the very nature of the transaction itself.

In the view of the Corona Virus Pandemic, most governments have put into place a price ceiling which restricts the price of face masks and other products such as sanitizers beyond which, private players cannot sell the product.

This leads to a situation wherein producers are forced to sell the product at a pre-determined price which helps in reducing the externality of non-consumption.

In a situation wherein private players are allowed to freely price masks, due to the added demand which is part of the market in today's scenario, the end result would be that many people would never have any access to face masks, and their healthcare would be jeopardized due to higher pricing and no controls on the same. Even though, the rich or those which could afford for higher priced masks may still keep the firms which manufacture them in profit, the end result for the society is lesser consumption which at this point of time would be harmful for the society at large.

Thus, to disallow people from over charging on an essential item like face mask, these policies are put into place and ensure maximum availability of a critical product in these tough times. This reduces the external impacts on the society which would have happened if free pricing basis demand and supply were allowed. Price capping of these types of goods brings in positive results through helping the health care industry in being relatively safer.

Please feel free to ask your doubts in the comments section.