This blog post examines, from an economic perspective, why government intervention is necessary and how far it should be allowed when prices of daily necessities become unstable, using the example of the mask rationing system.
The Mask Quota System and Mask Prices
It’s not just fleetingly popular items like Pokémon bread that can become hard to find; even essential daily necessities can become scarce. For instance, imagine a shortage of toilet paper rolls. At first, you might think you can temporarily substitute with facial tissue or paper towels. The problem is that everyone else will make the same judgment. Soon enough, those substitutes become hard to find too. This phenomenon actually occurred over a long period in the United States starting in March 2020.
So, when price systems become chaotic, should the government intervene, or should we wait for the market to resolve the problem on its own? To cut to the chase, government intervention is the right approach. However, that intervention must be based on a thorough understanding of market principles.
Why does hoarding occur?
The difficulty in obtaining specific daily necessities differs somewhat in nature from the scarcity caused by a sudden surge in popularity for a particular product, like Pokémon bread. In the former case, the primary cause identified is supply instability. Consumers typically purchase a consistent quantity daily. If supply to retailers decreases or becomes irregular, the price of that product may rise or it may become difficult to find altogether. However, a more significant problem is hoarding. Hoarding refers to the act of purchasing goods in large quantities beyond what is needed. When supply becomes unstable beyond a certain level, hoarding becomes more likely. The reasons for this can be broadly divided into two.
The first reason is to profit. Consider a simple example. Suppose toilet paper costs 1,500 won today. If it’s expected to rise to 2,000 won a week later, buying it now guarantees a 500 won profit. In other words, when expectations of a price increase form, the act of buying in advance becomes a rational choice. But what happens if countless consumers make similar judgments? Demand surges rapidly, outpacing supply, and prices rise again in proportion to the increased demand. As a result, more people buy goods in bulk intending to resell them at a higher price to others. Just like those trying to sell Pokémon bread stickers at a premium, a similar phenomenon occurs with everyday necessities.
The second reason is anxiety. Even though one could buy toilet paper a week later, the thought that supply might be unstable and there might be none left by then, coupled with the anxiety or fear of facing significant inconvenience, drives people to act. People act to gain financial profit, but simultaneously, they intensely dislike uncertain situations. The bigger problem is that it’s often difficult to accurately gauge just how uncertain most uncertainties truly are. In such times, the easiest way to resolve all uncertainty at once is to buy more toilet paper, faster. Because others make the same judgment, demand increases sharply.
Ultimately, hoarding occurs when two factors combine: people’s pursuit of profit or greed, and their anxiety or fear. This results in a further intensification of shortages. While the ratio of greed to fear may vary depending on the nature of the product or surrounding circumstances, the clear fact is that resolving shortages requires addressing both factors.
Of course, people’s greed cannot be viewed solely as negative. While government crackdowns are necessary against hoarding excessive stock without selling, the desire to earn money itself is natural. Therefore, measures preventing profit through hoarding become the more fundamental solution.
To control both greed and fear simultaneously, it is crucial to make people believe that prices will not rise further and that supply will soon normalize, resolving the shortage. If prices stop rising, the incentive to buy goods in bulk for profit disappears. Furthermore, the fear of suffering harm or inconvenience from being unable to obtain goods once supply normalizes also dissipates.
The mask rationing system is not just a simple rationing system!
In January 2020, as COVID-19 spread, a mask shortage emerged. Scenes of people standing in long lines to buy masks were observed nationwide. While some bought in bulk to resell at a profit, most people hoarded masks due to extreme anxiety about potentially contracting COVID-19. This case is also a classic example of a shortage phenomenon driven by a combination of human greed and fear.
In response, in March 2020, the Moon Jae-in administration implemented the mask rationing system to address the supply issue. The first key element of this policy was allowing every citizen to purchase up to two masks at 1,500 won per mask. This freed people from the fear of potentially being unable to obtain masks at all. Consequently, there was no longer a need to pay exorbitant prices for masks, and hoarding for resale profit naturally decreased.
However, fixing prices low cannot be achieved through regulation alone. If the government merely caps prices, suppliers are forced to sell at low prices and become reluctant to provide sufficient quantities. Therefore, the key to resolving shortages lies in increasing supply and building trust that the product will become readily available.
Another core element of the mask rationing system was securing sufficient supply. It was necessary to stabilize prices while ensuring mask-producing companies could earn reasonable profits. If companies demanded excessively high prices, the government could consider purchasing the supply using tax funds and then selling it to the public at a lower cost, depending on the situation. Considering that masks would be difficult to secure if all citizens rushed to buy them at a specific time, the government dispersed demand by dividing citizens into five groups based on the last digit of their birth year and selling masks on specific days of the week. This was the core structure of the mask rationing system.
Although the policy faced some initial confusion upon implementation, it succeeded relatively quickly in stabilizing demand and supply in the mask market. As a result, the mask rationing system was gradually relaxed starting June 1st of the same year. The policy simultaneously met two key requirements: stabilizing mask prices and ensuring sufficient supply. This successfully calmed the public, eliminating both the fear of needing to hoard masks and the economic incentive to do so.
Neither free distribution nor market laissez-faire is the answer!
Of course, there were also opinions opposing the public supply through the mask rationing system at the time. Their arguments broadly fell into two categories. The first was the claim that masks should be distributed free of charge. Free distribution would indeed help citizens who found even 1,500 won per mask burdensome. However, this would likely lead producers to reduce mask production volumes as they wouldn’t profit. If the government were to take full responsibility for supply, it would incur a fiscal burden of approximately 90 billion won per week. Furthermore, without controls like the five-unit system, supply would struggle to keep up with demand, potentially prolonging anxiety.
The second argument is that the market should be left to its own devices. The logic is that leaving it to the market will cause mask prices to rise, which will increase the number of people willing to produce masks, expanding supply. Ultimately, supply and demand will balance out, resolving the mask shortage. This argument has merit in the long term and theoretically.
However, attempting to solve this problem through laissez-faire would require considerable time. Building new factories to increase mask production takes a significant amount of time, and the shortage would persist during that period. Furthermore, once the mask shortage is resolved or the COVID-19 situation ends, demand will plummet sharply. In this case, those who invested in equipment to expand production will incur losses. In other words, supply cannot increase significantly and immediately in response to changes in demand.
Additionally, if mask prices become excessively high, low-income groups will suffer the most, inevitably increasing their risk of COVID-19 infection. Masks are not only a means of protecting individuals but also a socially necessary item to prevent the spread of the virus to others. Economically speaking, this constitutes a positive external effect. If mask prices rise so high that low-income groups struggle to wear them, this is not only an issue of inequality but also leads to increased exposure risk for the entire population.
For such socially vital goods, the government needs to manage prices to prevent excessive increases. However, simply controlling prices can lead to reduced supply, potentially worsening the problem of scarcity. Yet, if the government directly secures supply for certain essential items while controlling prices, price controls can function successfully. In this regard, the mask rationing system implemented in South Korea can be evaluated as a model case.
While economists generally take a negative stance on price controls, many differing opinions were also presented during the mask shortage. According to a survey conducted by the University of Chicago, over 70 percent of economists responded that leaving the mask problem to market prices was not desirable for the public good, and that government intervention was necessary to ensure appropriate distribution based on need rather than ability to pay.
However, government intervention in the market, like Korea’s mask rationing system, is not always straightforward or guaranteed to succeed. There have been instances where well-intentioned government intervention failed, and depending on the situation, leaving matters to the market might be preferable. Nevertheless, in critical phases of a problem, when the government responds cautiously and meticulously based on market principles, it can clearly produce better outcomes. In this regard, the mask rationing system remains an important case study demonstrating when and how government intervention should operate.
