How to limit hoarding amid outbreak

“What happened to the soap?” That’s what many Americans may be thinking as they wander forlornly through the aisles of local grocery stores (always careful, of course, to maintain a 6-foot distance from other customers). Fresh food may be abundant, but the necessities of a disease quarantine — hand soap, sanitiser, toilet paper and so on — are increasingly hard to find. For some items, such as peanut butter, this isn’t much of a problem. But for soap, hoarding could set back the country’s ability to suppress the coronavirus by making it harder for people to clean their hands — which medical professionals say is important to prevent the disease from spreading.
As it happens, economists have been thinking about the problem of hoarding for a while. In 1991, the late Harvard University economist Martin Weitzman wrote a paper called “Price Distortion and Shortage Deformation, or What Happened to the Soap?”, in which he tried to model why stores in the Soviet Union seemed chronically low on this crucial consumer good.
To analyse shortages, Weitzman tossed out the classic assumption that supply and demand simply match each other as if by magic. Instead, he modeled a more realistic process in which consumers buy a certain amount of something and then use it up over time, then go buy more. He found that shortages caused by government price distortions can be self-reinforcing —the more people have to wait in line or hunt around to find soap, the more soap they’ll stock up on when they finally do get a chance to buy. Hoarding only makes the shortage more acute.
Weitzman’s example is simple, but the existence of complex modern supply chains can magnify the problem. Simple models show that a small distortion in demand can cause suppliers to hoard their inventory.
Weitzman’s solution — as one might expect from an economist contemplating Soviet failures — was to simply let prices rise until the inefficient hoarding behaviour disappeared. But the soap shortages now facing Americans are not caused by government attempts to hold down the price of the good; they’re caused by a combination of psychology and rational precaution. On the rational side, going to the store less frequently means a lower chance of getting infected.
Meanwhile, the epidemic has created a sense of panic that makes people stock up on necessities in order to feel a little safer and more in control.
—Bloomberg

Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion