Oxygen Crisis: Fault of Free Market or Regulations?

Oxygen Crisis: Fault of Free Market or Regulations?

India is currently in the middle of a second wave of COVID-19. The second wave has been far deadlier than the first in terms number of cases but also in terms of death rate. Our healthcare system has effectively collapsed and its weakness has been bared for all to see. Medical oxygen was one of the first items to get scarce.

A narrative seems to be forming that this scarcity of medical oxygen is due to lack of regulations and black marketeers selling oxygen at high prices and that freeing the market would lead to more hoarding and higher prices.

This is false. The government paid for 100+ oxygen plants last year from PM cares fund. Barely 30% have been built till now. If you look at the actual production, you realize that most of the equipment is specialized and is fabricated at factories across the world. The state had to merely buy domestically or import this equipment, assemble it inside any of its warehouses and it would be functional within weeks. In fact that is exactly what is happening right now. But what happened to all the money that was invested? It went to the few "select people" that the state deemed fit for doing this job. The fact of the matter is that if there wasn't so much corruption, all the plants would have finished being built by the state in just a couple of months last year and yet, it is not even half completed.

The issue is not that the public sector or private sector can't respond to a crisis. Neither can really respond to it. It is a question of who has the greatest incentive to.

Allowing pricing mechanisms to work is crucial in this regard because the moment we would have had a crisis, the hospitals would have contacted their distributors and asked them to arrange for more oxygen. If the distributors faced a shortage they would asked the manufacturers to make more oxygen. If the manufacturers faced a shortage they would have expanded production capabilities by buying more equipment and land and hire more employees. If the equipment suppliers run out of equipment and can't produce it at a fast enough rate, then the producers will have to import the equipment. If the producers can't expand their production capabilities fast enough, then the distributors will import oxygen. At every level, each action would be incentivized by rising prices as supply decreases relative to demand.

If price controls are introduced, then no supplier will have the incentive, and in many cases the capital required to increase their supply capabilities. The only time the pricing mechanism fails is if at some or multiple or all levels, the entities supplying the demand face little to no competition. This happens due to licensing and regulations preventing even those with capital from supplying because the licensors and regulators are colluding with the already established entities to maintain a monopoly in the supply chain.

The reality is that, when the hospitals ran out of oxygen, their distributors were not even picking up their calls. Why? Because all of them had to divert all oxygen to the state to "ensure fair management". State intervention disrupted entire supply chains and arrested market mechanisms that lead to immense confusion, misery and deaths.

Add to this the fact that the government did introduce price control for Oxygen. In Sept 2020, regulators introduced price controls for Medical Oxygen after seeing reports of shortage and hoarding of Oxygen (Sources 1 and 2). This move likely ensured that increase in black market price of oxygen did not incentivize suppliers.

It really surprises me, how despite the sheer mismanagement of the pandemic at the hands of the state, to the point that people are only barely surviving by helping each other, that we somehow need more state control in such a critical industry. At a time when the police takes cylinders away literally from the hands of the people stuck in lines for days, it is private charities, with unpaid volunteers, who are doing what the state utterly failed to do.

This pandemic, objectively, has been the biggest proof of why we need to privatize and deregulate. And not just some privatization or just some deregulation, but all of it.