Question

Required Reading:

Ward, M, and Chrysanthos, N 2020, ‘’Higher than usual demand’ for toilet paper in NSW supermarkets’, Sydney Morning Herald, 26 June.

'Higher than usual demand' for toilet paper in NSW supermarkets

Premier Gladys Berejiklian has asked shoppers to remain calm after reports of bare toilet paper shelves in NSW following the reinstatement of product limits in Victorian supermarkets.

Toilet paper was in short supply at Coles and Woolworths at Roselands in Sydney's south-west on Thursday, the Herald has been told.

Posting on social media, shoppers also complained of empty shelves at Coles Merrylands and Woolworths Leichhardt in Sydney, as well as Coles Toronto in Lake Macquarie.

On Wednesday afternoon Coles, Woolworths and IGA said they would reinstate product limits for toilet paper, hand sanitiser, paper towels, flour, sugar, pasta, minced meat, long-life milk, eggs and rice at all their Victorian stores.

Coles, on Friday, reintroduced one-pack purchase limits for toilet paper and paper towels across all of its stores, including Coles online.

"We ask that customers continue to shop normally so that everyone can have access to the food and groceries they need," a spokesperson said.

Costco, which has stores at Marsden Park, Crossroads and Auburn, has also reintroduced a one-per-person limit on its toilet paper packs nationwide.

It is believed the panic buying, which was witnessed earlier in the pandemic, is being caused by an uptick in coronavirus cases in Melbourne over the past week.

Victoria reported its ninth day of double-digit case growth on Thursday, with 33 new cases.

NSW Premier Gladys Berejiklian said on Friday that shoppers need to "stay calm" as there was no need for items to be stockpiled.

"Please continue to maintain your calm; continue to do what you've been doing – NSW is doing incredibly well," Ms Berejiklian said, adding that she didn't "blame" people for being concerned as product limits were reintroduced in Victoria amid an uptick in cases.

"We all have to be on our guard, but we certainly, certainly don't need to change our normal buying habits. So please continue with your normal buying habits, there's nothing to worry about."

A Woolworths spokesperson said they had seen "higher than usual" demand for toilet paper in parts of NSW, and were monitoring the situation.

“We’ve seen pockets of higher-than-usual demand for toilet roll across parts of NSW [on Thursday], but not anywhere near the levels we saw in Victoria," the spokesperson said.

"We’ll keep a close eye on demand over the coming days. We continue to ask customers to buy only what they need, as there is plenty of stock to replenish our shelves.”

Question :

1. Evaluate the outcomes in the market for toilet paper in terms of Pareto efficiency, fairness, and the effect on the consumer surplus, producer surplus, and deadweight loss if:

(a) no restrictions are imposed by supermarkets.

(b) purchase-limit restrictions are imposed by supermarkets.

Include appropriate diagrams to illustrate your answers.

2. Suggest and explain two other ways the problem in this market could be solved. Evaluate these alternative solutions in terms of Pareto efficiency and fairness.

Answer 1

1a. If no restrictions are imposed on market, with higher than usual demand and restricted supply would lead to prices of sky roll rocketing. This would reduce or eliminate consumer surplus, raise producer surplus( by the same amount of loss of consumer surplus). Even though there is market equilibrium, many consumers are unable to consume the good due to shortage. Thus free market quantity is not a socially optimal quantity or pareto optimal as customers are hurt at the expense of sellers. There is deadweight loss arising due to market quantity being less than socially optimal levels of consumption.  

1b. If there are purchase restrictions imposed by State, it will ensure fairness qnd pareto optimality as no is hurt due to this restriction and the good is available to all for the time being untill the stocks are replenished . This however reduces consumer surplus as some customers are made to buy not as per their 'normal' buying habits. There is no loss of producer surplus. Further there is some deadweight loss arising sue to loss of consumer surplus.

2. Two other ways in which higher than usual demand and shortage situations can be met are -

a.Efficient Public distribution system- without imposing any restrictions on free market equilibrium, socially optimal quantity can be achieved if State makes available the goods by purchasing stocks from sellers and distributing at normal or reduced prices. This would ensure a pareto optimal allocation as everyone can be made better off without making any one else worse off. Here prices are checked from rising to high levels. Further it would ensure fairness as necessities are available to all income segments of the population. Further the consumer surplus is corrected through efficient distribution. Producer surplus is at market determined levels. However there is deadweight loss arising due to the State revenue spent on buying goods from sellers and distributing.

b. Price ceilings and import - This would restrict sellers to charge above the ceiling price set by State. Further any shortage will be met by imports of those commodities. This would hurt sellers by reducing producer surplus, however customer surplus will increase. Also no government Revenue needs to be expended in order to reach socially optimal levels. Therefore there will be fairness. However it is not a pareto optimal efficiency as sellers are hurt at the expense of customers.