Question

In Italy, COVID-19 special commissioner Domenico Arcuri announced that surgical face masks must be sold at no more than 50 European cents (76 cents CAD) plus tax. 2 What short-term impacts do you expect this will have on the market for surgical masks in Italy.

Answer 1

In the diagram, you can see the market for masks. D and S are the demand and supply for masks in an economy at a given point in time. Their point of intersection E is the equilibrium with Equilibrium price P and equilibrium quantity Q. When the government announces the maximum price at which masks can be sold (i.e 50 cents in this case) they impose a Price Ceiling. A price ceiling essentially means the maximum price set by the government beyond which the sellers cannot sell the commodity.

Price ceilings are usually imposed on essential goods which without government intervention will be sold at higher prices and would not be affordable. In the figure the Price ceiling is set below the equilibrium price to make it affordable for the masses.

Due to the price ceiling the equilibrium where qty demanded and qty supply are equal is disturbed. Qty demanded increases from Q to Qd whereas qty supplied decreases from Q to Qs. This means qty demanded is greater than qty supplied and this creates a shortage in the market of masks. Therefore the short term impact of this policy can be a shortage of surgical masks as their demand will exceed the supply (due to the price ceiling imposed)