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Prices in the time of coronavirus

March 25, 2020 - Wednesday 4:03 AM by Atty. Jamil Matalam

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There are those who are surprised that prices of some goods have increased despite the price freeze ordered by the government. Their surprise may have been based on the belief that because the government issues an order or a law, therefore people will follow. Clearly this is not the case, unless we think people to be robots. It was not because there is a quarantine order issued by the government that most people stayed at home. Most of them stayed at home because they were afraid of the coronavirus, and maybe because of some strict enforcement. Most behaved as such because it serves best their own interests. People stay at home primarily because they find it to their own advantage to do so, neither so much because there is a government statute to that effect, nor is it their moral responsibility to do so.

It is no surprise that prices of some goods will increase, or also decrease, in this time of coronavirus, despite price freeze orders by the government. Because of our own economic motivations, most of the time, we disregard moral responsibilities expected of us by statutes or some moral norm. We take the opportunities if we can. If circumstances permit, a seller will increase the price of his goods, but of course, subject to the agreement of the buyer. In the end, real prices are determined by the agreement of the parties to the economic exchange, not price regulatory statutes.

So why issue a price freeze order if this is the case? Most of the time, because the government is motivated by a moral responsibility to instill moral behavior in people. Mindful that most of us behave opportunistically if circumstances permit and that a drastic and unexpected event is happening, the government wants people not to take undue advantage of others. For instance, sellers may price their goods too high to the detriment of those who are in the lower income bracket. Producers of goods — sellers and suppliers — expect panic-buying at this point in time, so they will know that despite increasing the prices, the goods they sell will still be bought in huge quantities. Those in the high income bracket may crowd out those belonging to the lower income brackets who may be deprived of essential and their preferred goods in the market. The government does not want this to happen.

But did we not just say that price regulatory statutes do not really determine real prices but agreement of the parties to the exchange? So, does it even make sense for the government to issue a price freeze order? In the end, according to price theory in economics, the demand and supply in time will eventually stabilize to find an efficient price despite extraordinary circumstances. I think despite this being the case regarding economic exchange, the government should still issue a price freeze order for a few reasons.

First, moral motivation to protect social welfare is not enough; it should not end with issuances of statutes or legislation. It should not be what the former Chief Economist of the World Bank, Kaushik Basu, calls just “laws on paper.” If the government is serious enough that people obey the moral norms it intends to set up, then there should be certain mechanisms to make people observe it. There are several ways to do this, and they range from the moderate to extreme measures. I do not want to propose extreme measures such as criminal prosecution. The situation we are in right now is already bad enough; the prosecution of economic behaviors will only make things worse. A more moderate approach is to nudge people to observe the price freeze order, to make most of us more considerate of others. This nudge theory is advanced by the Nobel prize winning economist Richard Thaler. One of the main takeaways of this theory is that subtle means of enforcement are more effective than drastic and loud measures. Basically, this means putting in place subtle and indirect suggestions to influence behavioral choices.

There are several ways to do this depending on the creative imagination of the framer of the nudge mechanism. One way is to simply establish random government desks in the markets that will receive complaints for violation of the price regulatory legislation. The key here is to only be indirectly suggesting observance of the regulations and not to be prosecutorial about it. People behave as they are expected when they know they are being observed, and there is a semblance of possible penalty in the future. But to be able to do this nudge, there has to be a price freeze order issued by the government; the policy or legislation is the prerequisite for operationalizing the nudge mechanism.

Another good reason to issue a price freeze order is for building expectations in the market. According to a research by Kaushik Basu, mechanisms that help people build expectations are important in coordinating social behavior. In line with the nudge theory discussed above, the price regulation order somehow nudges people to observe the regulated prices by establishing expectations. It nudges them to coordinate with each other. When people go to the markets, because of the price freeze order, they now have expectations of the prices in the market. The seller expects that the buyer has certain expectations of the prices of the things he will buy, and because of that the buyer may not buy in case the prices are marked too high. This nudges the seller to set prices approximately to the prices set by the government. However, this will require intensive and extensive information drive; publishing it on newspapers and websites will simply not do. It should, at least, be posted near the markets. Only then will it sufficiently build expectations on most of us, and thereby may possibly establish observance of the policy.