ARTICLE

KUCHING: The change in price ceiling for three-ply surgical face masks has made it hard for
businesses such as pharmacies to sell them as they will now incur a major loss.

The new ceiling price for face masks had been fixed at RM1.50 per piece effective April 1, 2020.
These face masks, which are the public’s go-to as a means to curtail Covid-19 risks, were previously
capped at RM2 per piece.

According to Charles Liew, managing director of SHiNE Pharmacy, it is hard to sell face masks with
the price ceiling change because the concept of a price ceiling was not being properly looked at by
decision makers in the first place.

“When the ceiling was RM0.80, there were no masks in the market because no one could provide
masks at that cost, in light of huge demand and limited supply, causing the costs to invariably go up.

“With production costs increasing in China, these costs would inevitably get passed through the
various parties along the distribution chain. This is also not taking into account the fact that
transportation costs have also doubled, tripled and quadrupled,” he explained.

Because there was no mask in the market in Malaysia when the price was RM0.80, the Ministry of
Domestic Trade and Consumer Affairs decided to investigate, with the outcome of a new price ceiling
at RM2.

“Now, bear in mind that the RM2 was to allow masks to again come into the market. So, with that new
ceiling, pharmacies are starting to order masks again, at costs between RM1.60 to RM1.90 — just so
they could provide to the Malaysian public.

“With increased pressures, the government decided to re-look at RM2, and then due to these
pressures, decided to drop the ceiling to RM1.50.

“Thus, pharmacies that relied on the RM2 ceiling – with these stocks yet to arrive – all of a sudden
they can now only sell at RM1.50. Imagine importing 100,000 pieces of these masks – you
automatically lose money during this tough economic climate, and during MCO when you are already
losing money (from less customers).”

These did not include costs of import, shipping and retail.

Liew further believe this will cause significant strain not just on the pharmacies who now cannot
release these masks, but this also puts the health system as a whole at risk because more people are
exposed and at the risk of getting sick.

“The demand increased at the start of MCO but dwindled after the public began to accept the fact that
masks may never come – and yes, we get plenty of queries about restocking till today,” he revealed.
 When asked on what can be done to remedy the situation, Liew advised the government to “let
supply and demand dictate the price because we are competing with the rest of the world for limited
resources.”

“For companies who made orders between the date of the RM2 announcement and the date of the
RM1.50 announcement, if the government were to stick to RM1.50, the government could deal with
this on a case by case basis,” he said. “If a company could prove that a mask order was made
between the above dates, then they would be allowed to sell at RM2, or even sell at cost. Any way to
not lose money as a business is welcomed at this juncture, because all SMEs in Malaysia are
struggling, one way or another. Losing more money could really mean livelihood hanging in the
balance.
 Commentary:

The article discusses the price ceiling fixed by the Malaysian government on three-ply surgical
masks. The initial price ceiling was set at RM 0.8 but with no masks in the market, because no one
could provide at such a low price, the price ceiling was increased to RM2. The decision was relooked
because of the increased pressure on the government, which led to a drop in the price ceiling to RM
1.5 per piece, effective from April 1, 2020. A price ceiling is a maximum price set by the government
to make a good or service affordable for low-income consumers.

In a free market of masks where there is no interference from the government, allocative efficiency is
achieved where the quantity demanded is equal to the quantity supplied. As figure 1 shows, the
market would produce at quantity Qe and price Pe. When the government intervenes with a price
ceiling, it means that they believe that the equilibrium price is too high for low-income consumers,
hence they set the price ceiling below the equilibrium price at price P, as shown in figure 2. The
decrease in price results in a rise in quantity demanded (Law Of Demand) and a decrease in quantity
supplied (Law Of Supply) because at lower prices consumers are more attracted to the good and, at
lower prices, businesses find it less profitable to produce goods hence they will allocate their
resources to other goods. At price P the quantity demanded is Qd and the quantity supplied is Qs,
which leads to an under allocation of resources or an excess demand of quantity Q2-Q3. The price
ceiling transfers welfare from producers to consumers who get to pay lower prices for the goods and
producer surplus decreases as now producers are only able to sell their goods at price P.
 Even though the price ceiling has been shown to benefit low-income consumers by making masks
more affordable, it leads to a shortage of quantity Q2-Q3. In a free market, the consumers would
compete to push the price up and the price would rise to the equilibrium price, but in this case, it
would be illegal to push the price up hence if the market is left as it is there would be a severe
scarcity of masks in Malaysia. Due to scarcity, a black market has emerged, with prices that are
higher than the market price for those who have been unable to obtain the goods, this can lead to a
government failure. Furthermore, sellers are usually the ones who compete to get customers, but
when there is a shortage, sellers can reduce the quality of the mask by cutting costs to earn more
profit, which is disastrous because if the quality of masks decreases, there are more chances of
people transmitting the disease covid 19 to one another. The price ceiling could also lead to an
increase in the unemployment rate, because of the lower price, firms would produce less quantity,
resulting in lower profits and the firms would have to cut back on jobs, which would have a significant
impact on the country's economy at such a critical time.
To eliminate the excess demand, the government should attempt to shift the supply curve to the right
until equilibrium is reached at maximum price (price ceiling). The government could achieve this by
providing subsidies to pharmacies to encourage them to supply more of the goods, which would shift
the supply curve to the right by the amount of the subsidy, as shown in figure 3. The government
could also begin producing the product itself, thereby increasing supply. When the government
intervenes through the direct provision and provides subsidies, there is an opportunity cost (It is the
next best alternative forgone); these are the resources that the government could have used for other
purposes such as education, infrastructure development, and healthcare.

Businesses will suffer significant losses as a result of the change in the price ceiling from RM2 to
RM1.5 during such a difficult economic period. As stated in the article, the government should allow
firms that can prove that a mask was ordered between the above dates to sell it at RM2. Customers
will not buy from pharmacies that charge much higher prices if they have the option to buy at a lower
price.Instead of allowing them to sell at RM2, the government should provide them with subsidies for
stock purchased between the above dates. This will allow pharmacies to compete on cost with other
pharmacies, and their losses can be avoided.

The concept of efficiency is relevant to the situation because the price ceiling set by the Malaysian
government creates a disequilibrium with an under allocation of resources and a deadweight loss.
This under allocation will result in major issues such as increased transmission of disease Covid 19
and economic losses for pharmaceuticals.To address this, the government must intervene through
subsidies and direct provision, increasing supply until efficiency is achieved at maximum price. When
they achieve efficiency, it means that resources are allocated in the most efficient way possible from
the standpoint of society.