The Economics of Free Surgical Masks

El Universal reports that Mexican police have arrested 13 individuals accused of selling surgical masks on the street.  Should the government arrest individuals selling surgical masks?

Any capitalist would in general support the ability of individuals to trade cash for the goods they desire.  However, the case of the surgical mask may be different.  Surgical masks are now being given away for free by the Mexican government.  Thus, the vendors are hoarding free surgical masks and selling them at a profit.  The price of a surgical mask on the street is between $10-$50 pesos ($0.75 to $3.50 USD).  The goal of preventing the sale of masks is to make the hoarding of the government-purchased masks unprofitable.  

In the long run, a surge in demand for surgical masks will increase the price and drive up production.  However, during a pandemic such as the swine flu, the short run supply of surgical masks is fixed; production cannot increase fast enough to keep up with demand.  Thus it seems that have the classic case of a shortage: demand is high and the government is trying to hold down prices–in this case to zero.  However, the real cause of the shortage is short-run in nature; production has not yet been able to catch up with short-run demand.  

What if the government did not purchase the masks first and give them away?  What if they instead just allowed the private market to work?  If surgical masks help prevent getting swine flu, then the price of surgical masks would rise dramatically. Manufacturers of surgical masks would receive the same amount of money, but instead of getting paid by the government, they would be paid by firms.  Firms would be the winners in that they could resale the masks at a profit.    Wealthy and middle class households would be able to purchase the masks and poor families would not.  Overall consumer spending would likely increase.  Instead of paying for the surgical masks through government purchases (i.e., taxes), they would they would pay firms. Since, firms would increase their prices and this would lead to a transfer from consumers to firms.  Overall, we would still have the same number of surgical masks but the distribution of them would be skewed towards wealthier individuals, since they could afford the higher prices.

Let us look at a different situation. CNN reports that surgical masks’s “…real value seems to be in keeping people who are already ill from spreading the virus, rather than protecting healthy people.”  In this case, demand for high-priced surgical masks may actually be low.  This is classic case of externalities.  Your willingness to pay for a surgical mask is low because they may not protect you against the flu, but your willingness to pay for others to wear a surgical mask may be higher.  In this case, government subsiding surgical mask sales–or in this case, buying surgical masks and reselling them at a zero price–gives individuals more of an incentive to wear the masks.  

Social pressure may drive up your willingness to pay for masks.  If your peers shun you because you refuse to wear a mask, you may be willing to pay for a surgical mask even if it doesn’t provide you with any health benefits.

Another reason to maintain the zero price is to prevent corruption.  If individuals can sell surgical masks at a profit, government workers will have an incentive to give away surgical masks to their friends.  Their friends can collect rents from their receipt of a large quantity of free masks.

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