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Flu Season Woes: The Misallocation of Medicine
Allocation mechanisms can lead to shortages if resources aren't distributed efficiently or equitably. Misallocation can result in increased prices, rationing, and even social unrest.
Have you had trouble finding essential over-the-counter flu medicines at your local pharmacy lately? It’s likely due to the current "tripledemic" of respiratory illnesses happening around the United States, which include the flu, RSV, and Covid-19. The sudden increase in demand for cold medicine has caused a shortage of these products, especially the version meant for children. But have you ever stopped to consider where these shortages might be coming from?
When there is a shortage of a good or resource, it's important to consider how that item is being allocated. Allocation mechanisms are the ways in which goods and resources are distributed among individuals and organizations in a society. By ensuring that resources are being used efficiently, we can help to ensure that these vital products are accessible to those who need them. There are several different mechanisms that can be used to allocate resources, each with its own economic implications.
Before we consider different ways that goods can be distributed, keep in mind that there isn’t a distribution method that will satisfy everyone. Because there is a physical limit to the number of items available, they must be distributed in some method, whether or not that method is explicitly stated. Most people can agree that goods should be distributed efficiently (without waste), but often disagreements come up over the fairest way to distribute those goods. Below I summarize some of the most popular allocation systems for an economy but keep in mind that most advanced economies are a mix of these.
One of the most common allocation mechanisms is the market system, which relies on supply and demand to determine the price and quantity of an available good. In a market system, the price of a good reflects its scarcity, so when demand increases the price should also increase. If prices don’t adjust, the demand shock can lead to shortages. In our medicine example, raising prices might better allocate the remaining stockpile to those who are willing and able to pay more. This isn’t often a very popular outcome because it comes across as unfair to those who may benefit more from the medicine more, but aren’t able to afford the higher price.
Another allocation mechanism is the command system, in which some central authority controls the distribution of resources. While this system is often associated with the Soviet Union or Cuba, there are aspects of many market-based economies in which governments determine the method of allocating some resources. This method can be effective in addressing shortages, as the government can prioritize the distribution of goods to those who need them most. However, it can also lead to inefficiencies and unfairness if the government does not have complete information about who needs the resources the most.
Many pharmacies have moved away from market solutions (raising prices) and have instead taken a more command-based approach. These stores have taken it upon themselves to determine how much individual shoppers can purchase. While there are a number of methods they could have used to allocate those products, most have chosen to ration the amount that can be purchased:
Walgreens limited online purchases to six fever-reducing products per order but is not limiting in-store purchases, the company said. Kroger is limiting its customers to purchasing two pediatric pain medications and four cold and flu items. Rite Aid does not have purchasing limits on the medicines in stores but is restricting online purchases of 4 oz. grape-flavored Children’s Tylenol to five units per customer.
That brings us to our third method of allocating resources, the traditional system, in which resources are allocated based on social norms and customs. For example, in a traditional society, resources may be distributed based on one's status within the community. While this system can foster a sense of community and social cohesion, it may also lead to inequalities and discrimination against certain groups.
While those are the three most prominent methods that span entire economic systems, there are a lot of more common allocation methods that are more localized or may appear only in certain instances. For example, a lottery system is a popular method of distributing a limited number of products among a large group of people. This method appears to be fairer, but it doesn’t efficiently allocate the product to those who value the product more highly. This scene from Jingle All the Way is a great example of a lottery system coupled with a price increase from a market system:
First-come-first-served: the good or service goes to the first person to claim it, like concert tickets (which also require money!)
Majority rule: the good or service goes to the person who gets a majority (or sometimes a plurality) of a vote, like a Senate election
Sharing: the good or service is divided and given to multiple people who mutually agree to only use part of it, like a meal at a soup kitchen
Force: the good or service is taken by someone through legal or non-legal means (there is no voluntary exchange), like theft
Competition: the good or service is awarded to the person who won a game, event, contest, or something similar, like an Olympic gold medal
Arbitrary characteristic: the good or service is given to someone just because they meet certain requirements – age, grade, geographic location, race, gender, shoe size, etc., like giving a balloon to the youngest child.
In conclusion, the shortage of cold medicine during the flu season is a result of the misallocation of resources. The mechanism by which resources are allocated can have significant economic and social implications, and it is important to consider the pros and cons of each system when addressing shortages.
The CDC estimates that there have been at least 150,000 hospitalizations and 9,300 deaths from flu alone so far this season [The New York Times]
Founded in 1922, the Union of Soviet Socialist Republics (USSR) eventually grew to 15 republics with nearly 130 ethnic groups across 11 time zones [History]
There are an estimated 24.8 million children under the age of 5 in the United States [Federal Interagency Forum on Child and Family Statistics]
The median annual salary of a pediatrician in the United States was $170,480 per year in 2021 [Bureau of Labor Statistics]