Question

During the Covod-19 pandemic ventilators became a much sought after item. Governors were competing with each other and with the federal government for these much needed life and death items.

Q1. Why did this happen?

Q2. What can be done to prevent it from recurring, say during (God forbid) a second wave.

- Include in your discussion the following key items:

Resources Quantity Supplied and Quantity Demanded Equilibrium Price and Quantity and Market Equilibrium Shortage vs Surplus Price Gouging

Market Failure Imperfect Industry Structure The Relevant Determinants of Supply and Demand

Also apply these concepts to the current situation with toilet paper and with oil.

Answer 1

Answer 1

Durng the Covid 19 pandemic, ventillators became a much sought after item. Governors were competing with each other and with the federal government for these much needed life and death items. This happened because ventillators are crucial for taking care of the critically ill patients during this pandemic. Moreover, the resources are limited i.e. the quantity supplied or ventillators is far less than the quantity demanded of ventillators. This is because in normal circumstances, the demand of ventillators is not as high as it is during the time of this pandemic and the production of ventillators takes time. So the supply cannot respond immediately to an increased demand.

In such a scenario, where demand is high and supply low, the prices of ventillators would start rising hence distorting equilibrium prices and quantities. The prices would start rising high up with the increased demand and limits on supply.

Also, there would be a situation of price gauging. Price gauging refers to the situation when suppliers start increasing the price of the good or a service they are supplying above the price which is considered as fair after there is a demand or supply shock in the economy. This usually happens for necessities after some natural disasters or pandemics like Covid 19 because the demand of necessities is high during and after disasters. Price gauging can especially be seen for life saving commodities like ventillators. This distorts the market from a competitive free market structure where fair prices prevail and leads to the prevelance of the monopoly kind of market structure where suppliers charge a price higher than the competitive market price and enjoy excess profits due to this change in demand.

Price of the good or service is a major determinant of the demand and supply for that commodity. Availability of resources like raw materials, labour force, technology etc. also determine the supply of goods and services. During crises like pandemics, there is a resource crunch in the economy while the demand for like saving objects like ventillators goes up.

It was due to these reasons of increased demand, shortage of supply, anticipation of price rise of the ventillators and distortion of the market for ventillators that the governors wanted to procure more and more ventillators for the citizens of their state and wanted to keep a good enough stock of them for meeting with this emergency and hence they were fighting with each other and with the federal government.

Answer 2

The steps which can be taken to prevent it from recurring during the second wave are as follows:

First of all, production of essential and life saving items needs to be revamped in order to ensure that there is enough buffer stock with the government of these essential and life saving items which can be used during times of crises so that panic does not arise among people.

The government needs to itervene and regulate the prices of these essential items during times of crises so that suppliers do not take undue advantage of the situation and price gauging can be prevented.

The government needs to provide more incentives to the producers like subsidies and tax incentives to supply higher quantity of these essential items. It also needs to try and remove all kinds of supply chain barriers so that the inputs for the production of these items can be acquired easily and the output reachers the customers easily.

The government also needs to build a trust and faith among the people and ensure them during such crises that there is enough supply of the essential items and that they will be provided at fair prices and market structure will remain competitive. This trust and faith in the proper functioning of the market would ensure that people will not start panic buying or hoarding and there are no fights among the governors for ventillators in second wave of the crises.

Also, stricter action needs to be taken against people who hoard the essential items for arbitrage purposes i.e. those who hoard the items when demand rises and then sell them when the prices have risen at that higher price to earn abnormal profits.

These are just some of the steps which can be taken to prevent it from recurring.

___

Similar logic can be used to explain the current situation with toilet paper and oil. First let's discuss about toilet paper.

When the Covid 19 started spreading it's legs at a faster rate in US, there was panic among the people regarding toilet paper and they started panic buying toilet paper in huge quantities. Toilet paper went off the shelf of the shops within moments of restocking them.

This also happened because people anticipated that due to Covid 19, there would be shortage of the supply if toilet paper in the near future while the demand would still be high as it is an essential item, so they started stocking up on toilet paper. Also, suppliers would start engaging in price gauging i.e. the price of toiler paper would go up due to increase in demand while supply being constrained, so people wanted to buy enough toilet paper beforehand. Again, since there is time lag between the demand and supply of goods unless there is enough inventory with the firms, so the supply would take time to meet increased demand and in the mean time either toilet paper would become unavailable in the market or it's prices would rise. So to avoid getting out of toilet paper people started hoarding it and consequently creating a further shortage of toilet paper in the market in much lesser time than it would have happened if people would not have started panic buying.

Now, let's look at what's happening to oil supply, demand and it's prices.

What's happening to oil is exact opposite of what happened in the case of ventillators or toilet paper. In the case of ventillators and toilet paper, there was increased demand and fear of supply shortages and price rise, due to which there was increased purchases of these goods as compared to the normal situation. But what happened with oil is exactly opposite of this. Due to Covid 19, almost all nations across the globe are under complete lockdown, due to which most of the industries have been closed, vehicles are not being used, and consequently the demand for oil and taken a real slump i.e. the demand for oil has fallen tremendously. Since the supply for oil cannot be cut immediately, while demand has gone down so there is excess supply of oil. The export and import of oil has fallen to very low levels. Although the countries are trying to stock up oil for future but there is a constraint on the storage capacity of oil. Due to this the prices of oil have gone down exponentially. US is running out of storage capacity while supply is still high relative to demand, hence price of oil is at very low level.

All of these phenomenons are taking place only because of external supply or demand shocks due to which the demand or supply of these items has been affected drastically and there have been distortions in the market structure and equilibrium prices and quantities.