Impacts of Lowering Ceiling Price towards the Consumer, Industry, and Government

When a government decides to lower the ceiling price, the effects depend on whether the new price lies above or below the market equilibrium price. If the ceiling price is above the market equilibrium, then there will not be an economic issue because the equilibrium price is not affected. It is thought of as "non-binding" price control. Economic problems arise when the ceiling price is lower than the market equilibrium which is also thought of as “binding” price control. This scenario affects the supply and demand curve of a commodity. When the Malaysian government lowers the ceiling price for three-ply face masks from RM 1.50 to RM 0.70, the price change affects these masks' supply and demand in the country. The effects of this on the consumers, industry, and the government are analyzed below.

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The government aims to reduce the ceiling price to make it more affordable for Malaysian citizens to purchase the masks. This action achieves this, and as a result, demand for the three-ply face masks will increase. However, if the price cap affects the equilibrium price, the industries manufacturing these masks will have a production problem. The producers will not manufacture as much as they did with the original ceiling price, resulting in reduced mask supply. This situation of low demand and high supply affects the three involved parties differently. There will be a mask shortage in the country for consumers because supply does not meet their demand. The immediate challenge consumers face when there is a commodity shortage is consumer competition. To get the three-ply face masks, consumers will have to use more resources, including time, energy, and money. Consumers will have to wake up very early to visit shops and other outlets selling the masks. In these shops, they will find other consumers who woke up early, too; therefore, they will have to stand for long hours in lines to get the commodity. It will consume a lot of their time and energy, which was not the case with the original ceiling price. An example of where this effect was felt is in the 1970s during the energy crisis in America. The government rationed the amount of gasoline a consumer could use, leading to cars lining up in the street to get the commodity (Stocking, 2012).

Consumer competition creates the emergence of black markets for these face masks. It happens because consumer competition continues until the "real price" is reached. It is the original ceiling price of a commodity, in this case, RM1.50. It is the maximum price a consumer will be willing to pay for a commodity experiencing a market shortage. Due to the availability of consumers who will be willing to pay for the face masks above the new ceiling price, people will see this as an opportunity resulting in black markets' development for the three-ply face masks. The effects of these markets are felt by all three parties. First, the probability of consumers buying low-quality three-ply face masks will increase because sellers will source for cheap masks to make more profits. Secondly, there is no way for the government to monitor transactions in the black market resulting in losses in revenue. Black markets result in "hidden costs." It is the money between the new ceiling price and the real price (Chernoff, 2015). In this case, the hidden cost of a face mask will be RM 0.8. These costs are created because of consumer competition, and they are lost to society.

On the other hand, the government reducing the ceiling price results in three-ply face mask manufacturers to lower their production. It may because the reduced price affects production costs. When these companies reduce the number of manufactured face masks, their profits and operational finances are reduced significantly. The costs of operation will be higher for some companies, especially small scale manufacturers, because of the imposed price cap. It leads to these manufacturers' shutdowns or exiting from the market, further reducing the supply of three-ply face masks. For those that will survive these impacts, they may be forced to downsize or conduct staff layoffs. Deadweight loss is also created because sellers and buyers who were able to trade in the market with the original ceiling price will not do so with the reduced price. The quality of three-ply face masks produced may also be affected by the government's lowering the ceiling price. Companies will produce cheap and low-quality face masks, risking the health and lives of the consumers.

The reduced ceiling price will also impact the Malaysian government. The first problem will be ensuring a constant supply of the face masks in the country. It has to ensure that manufacturers can produce the commodity without shutting down or exiting the market. To enable this, the government will have to ensure that these masks' cost is lowered significantly. It can be done by reducing taxes on the raw materials used for manufacturing, lower electricity and water bills, or issuing loans and grants to these companies (Chernoff, 2015). Not doing so will result in a low face mask supply. Increased demand and low supply are also problematic to the government because its citizens will not have enough masks, which are vital in stopping the Covid-19 pandemic spread. A shortage will result in numerous outbreaks of the country's disease, resulting in overcrowded hospitals and health facilities. The government will have to deal with a collapsing healthcare system, which may be costly.

Conclusion

It is evident that the Malaysian government reducing the ceiling price may create an economic crisis in the country if it affects the equilibrium price. The effects will be felt by the consumers, producers, and the government itself. Both the producer and consumer surplus will be smaller with the reduced price as compared to the original ceiling price. As much as the government intends to lower the face mask price, the country will raise these masks' price. Lowering the price to help consumers will actually raise the price. As a result, numerous citizens will have no three-ply face masks to protect themselves from the deadly disease, resulting in the crippling of the healthcare system and more loss of lives.

References

Chernoff, A. W. (2015). Between a cap and a higher price: Modelling the price of dairy quotas underprice ceiling legislation. Canadian Journal of Economics/Revue Canadienne d'économique, 48(4), 1403-1429.

Stocking, A. (2012). Unintended consequences of price controls: An application to allowance markets. Journal of Environmental Economics and Management, 63(1), 120-136.