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An economic perspective on the shortage of Coronavirus tests

By Jonah Chan
web posted November 28, 2022

During the pandemic, a number of my acquaintances were forced to wait extremely long periods of time for a COVID-19 PCR test. My family found it very difficult to book an appointment when we needed one. For example, when I needed to get tested before a piano audition this past spring, we had to scramble to find a test site because nearly all the appointments were already taken. Even when we did locate one, we worried about whether the results would come back in time because of all the other people who were also getting tested at the same time. What contributed to this shortage of tests and backlog of results, and how does economics help us understand this scenario?

This paucity of COVID tests is an excellent example of the effects of a third party payer. Insurance companies were required to pay for the PCRs, and Uncle Sam stepped in for those who did not have insurance. When prices are reduced for the consumer, the quantity demanded usually rises. However, on the supply side, as higher and higher quantities are demanded, prices will also rise.

Another way to put this is in terms of opportunity costs. For the test suppliers to provide additional tests, more factories and labs had to be made or converted to produce and process PCR tests. Each additional factory or lab cost more than the previous one, following the law of increasing opportunity costs, so the suppliers would naturally charge more as the quantity demanded increased. For the consumers, as the price effectively dropped to nothing, the opportunity cost was greatly reduced. Thus, they demanded much more, since they were giving up very little for it.

Thus, quantity demanded increased, but since the suppliers charged more for a higher quantity supplied, the third party payer, the government or insurance companies in this case, had to step in and create a sort of false equilibrium. The overall consequence is increased spending due to more buying and producing than would normally take place if the market were allowed to achieve equilibrium.

Essentially, this is what happened in the PCR test market because, in most cases, the amount paid by the actual consumer was nothing! At a price of $0, the demand is almost infinite. After all, who would turn down free goods and services? Of course, the insurance companies and the government would not be willing to pay an infinitely high price to keep the quantity supplied consistent with the quantity demanded. Therefore, quantity demanded exceeded quantity supplied, and there was a shortage for a period of time.

This is yet another instance of the federal government acting with good intentions but ultimately harming its citizens and its economy. By trying to artificially reduce the price, it increased the demand, created a shortage, and thus actually raised the prices, which we as citizens paid ultimately through our taxes and through higher insurance premiums. In trying to make the much-needed COVID tests more easily available, the government in fact only made it harder for those who actually needed one to obtain one. ESR

Jonah Chan is an AP Economics student in high school. (c)2022 Jonah Chan

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