Sent in by someone I know who prefers to call themselves Archie Elle.
By introducing an obligation to wear face masks the government has to face a free market mechanism from page one of the economic school book: demand and supply determine the price. Thus, if additional demand is created when supply is already short, prices tend to increase.
This article is not intended to blame the Maltese government for taking no precautions at all for what seems would have been a common sense idea for any kind of expectable epidemic or pandemic spread of a disease, namely holding a basic stock of protective gear, including masks for the health service and the average man and woman living on the island and/or to have at least supply contracts at hand. It is not intended to question the health effect of wearing mandatory face masks, too.
However, it must be allowed to ask the question what the effects of fixing a price for mandatory masks will be.
Back to the market mechanisms. Obviously, the government did take into consideration the basic price finding mechanism and expected higher prices for face masks due to the artificially created demand of masks, knowing that the world market of masks has seen prices exploding with countries like Germany being proud to be able to pay even the highest prices, as their Minister of Economy stated recently. Thus, setting a fixed price does seem to be a good idea. If there would not be some other market mechanisms that most likely will kick in once a price has been set.
First, market participants tend to try to optimise their profit.
Having a set price for a good will therefore likely stop price competition for this product as long as supply is short. Why should a dealer of masks reduce prices below the set price if they know that consumers have to buy them anyhow?
More importantly, knowing that the price is set, the market will loose another competitive tool: quality. If the consumers have a choice and two products have the same price, they will tend to buy the product that is of higher quality to them; in our case certified medical face masks rather than products of low quality.
However, with a set price the sellers do not have an incentive to bring high quality products on the market as they most likely are more expensive for them to purchase/produce and thus, their profit margin will be lower if they can not charge more for them than for inferior products.
Further, we have to consider that the face masks most likely will not be produced in Malta. Thus, dealers in Malta on the one side are facing a volatile world market price with the negative effect that their suppliers know that there is a given mandatory demand and a fixed price. Maltese importers being in competition with countries with deep pockets and purchase power of another dimension will loose any room for negotiations. Business partners in the supply chain can easily calculate what they think is a reasonable profit and will link their prices to the fixed price.
In consequence, there will be a tendency that Maltese consumers will pay high prices for for their face masks for a long time and that they will not get the best quality of products. Unless, the government is willing to regulate the prices on a daily basis. But stop, if so, the market mechanisms will kick in again.
Uncertainty about future regulated prices will lead to the problem of how to deal with stocks of “expensive” masks. An issue that had just yesterday been addressed by the government with respect to stocks already at pharmacies and seemingly the only viable solution was that the government offered to make good for losses that pharmacies are making in selling masks from their overpriced stock.
However, this will prove to be complicated and may require more regulation; how do pharmacies have to prove their higher purchase price, how much profit on a single mask has been made in the past (given that the consumer price was at about €0.07 per mask it is unlikely that the margin was more than about €0.03 and the actual profit must have been much below) and what is a reasonable profit for them now?
Others in the supply chain, like whole sellers, will follow and unless the government is willing to grant more and more subsidies, in future Maltese dealers will have to make low orders with their suppliers which will lead to higher prices as any volume discounts will be lost and transportation cost per item will go up. So in fact, further regulation will increase the initial problem at least as long as quality face masks are in high demand on the world market for medical face masks.
Last but not least do we at least pay a somehow fair price for our masks? Setting a price of €0,95 for a standard one time use face mask seems way above any reasonable price, considering that a high quality mask for surgical use did cost about €0,07 back in January including shipping when bought in a box of 50 masks.
If we assume the average person does need three one-way masks a day (i.e. for using public transportation to and from work and shopping once a day), the Maltese population will have a need of around 40 million masks per month (calculated: 450.000*3*30). Given that the fixed price is €0,87 above the market price in January, the Maltese consumers will be overcharged by €35 million every month not even considering the fact that most likely the quality of the masks will be very poor (there are reports claiming that about 20% of the face masks currently delivered from China are useless).
This may make other deals of the Maltese government with fixed prices look good, but in fact is a disaster. One may argue that consumers can use self made or reusable masks but even one mask a day will account for a total overcharge of €10 million per month and how many months is this supposed to go on? Plus, the medical benefit of self made and reusable masks is doubtful especially for the high-risk group; but that’s a matter for medical experts to decide.
What’s the solution? There are in fact two actions the government may take in a market-driven environment:
(i) use laws that prevent suppliers from unreasonably and unfairly overcharging consumers. These interventions can based on the real market prices and the vulnerability of the consumers. If not already in place, such statutory provisions may be found useful in the future with respect to other situations too. Accompanied with respective criminal prosecution this would be an effective step. Yes, we can not stop foreign suppliers that are not falling under Maltese laws in their attempt to benefit from this situation, but we cannot do so on the world markets anyhow. But, at least we would know who actually is the beneficiary in the supply chain.
(ii) use the purchase power of a nation and the political ties to organise a central purchase of face masks as long as the world market has high demand and therefor high prices. There would be economies of scale with a central purchase, which would even grow if the EU would take some responsibility. Distribution could be made by local distributors at a fixed or even free margin. This would automatically make sure that the consumers benefit from changing prices at the world market and would still allow competitive supply of products that have not been purchased centrally at free prices.
In addition, the government could easily apply subsidies on the masks for consumers and not some unknown beneficiary in the supply chain. Making sure that subsidies, if any, directly benefit the consumer seems only fair, social and necessary, considering the fact they are made mandatory and that here may have been some negligence in the past.
One thing should be made certain: there must be a review on who actually will take the benefits from the fixed prices and the subsidies. As it is now, it will for sure not be the Maltese consumer as the fixed price is not and for reasons explained above cannot be below the world market prices unless it is subsidised with tax money.
One of the question will be, do we allow foreign suppliers/manufacturers to overcharge us or is somebody on the island making an unreasonable profit too?