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The economics of toilet paper: an attempt to explain the madness

Bernard Tong
Bernard Tong • 5 min read
The economics of toilet paper: an attempt to explain the madness
Like it or not, empty shelves in supermarkets is a sign of market failure.It implies an inefficient allocation of production capacity and distribution of goods and services.
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SINGAPORE (Mar 13): The Covid-19 outbreak will be remembered for causing not just an economic disruption, but also a bizarre social phenomenon: the run on toilet paper. First in Hong Kong, then Singapore, people across Japan, Canada, the US and Australia have joined in on hoarding this simple household product.

Videos of security guards watching over toilet paper rolls and fights breaking out in supermarket aisles have gone viral. The phenomenon has even prompted Singapore’s Minister for Trade and Industry Chan Chun Sing to decry such behaviour as “sia suay”, or embarrassing.

Perhaps there is a simple explanation to this seeming insanity.

A substitute good

In Economics, substitute goods are two different goods or products that can be used for the same purpose. For example, a Samsung smartphone is a substitute (for most people) for an iPhone. If the price of one good increases, the demand for the substitute will likely rise as a result.

There has been a report claiming that a company was caught using toilet paper in its manufacture of face masks, so as to meet sky-rocketing demand for the latter. Regardless of the report’s authenticity or the effectiveness of toilet paper as masks, rational behaviour is typically thrown out the window during a crisis. If there is a sufficient critical mass of people who deem toilet paper as a close substitute for masks, the toilet paper run can be explained in the same light as the mask run, which is arguably less frowned upon during a pandemic.

Low opportunity cost

In most situations, hoarding goods can be costly. However, in this case, the opportunity cost of hoarding toilet paper is low. In economic terms, “opportunity cost” refers to the value of the next alternative foregone in order to choose something else. For example, if you spend a thousand dollars on a brandnew iPhone, the opportunity cost is the thousand dollars you could have used to buy something else.

In this case, the opportunity cost of hoarding toilet paper is marginal. Each packet of ten rolls costs just a few dollars, and each packet is light enough to carry around. The rolls are bulky, but can be stacked which makes them easy and convenient to store. Unlike perishables such as fresh milk and products such as canned food, there’s no “best before” date.

The hoarder’s dilemma

The prisoner’s dilemma, perhaps the most famous illustration of game theory, provides a useful framework for understanding what governs the balance between cooperation and competition between individuals when it comes to strategic decision-making.

In the classic example, two robbers have been arrested by the police and will be interrogated in separate rooms.

Each prisoner will have two options: he can confess and thereby implicate the partner-in-crime; or he can stay silent. If one confesses and the other says nothing, the one who confessed will receive a penalty that is less harsh.

Given that each does not know what the other would do, game theory suggests that both robbers are likely to confess and the consequence would be imprisonment for both, which is actually the worst possible outcome.

Similarly, in the case of toilet paper runs, there are two binary options. Rush out to buy, or don’t. If one decides not to buy when everyone else is stocking up, one would run out eventually and suffer from the lack of this daily necessity. Therefore, game theory would suggest that the most logical and optimal action is rushing to stock up, which in turn would result in the spectacle of rows of empty shelves, harassed security guards, and screaming catfights.

Back to the basics

According to the law of supply and demand, as prices of a good rise, demand will decrease and suppliers will expand production. Yet, when demand for toilet paper went through the roof, prices did not rise as well. Perhaps, supermarkets know better than to raise prices and be accused of profiteering. Or, there could be a deterrent effect from the authorities who have made an example out of businesses that tried to do so. This resulted in “under-priced” toilet paper that have not adjusted to market forces.

Like it or not, empty shelves in supermarkets is a sign of market failure.

It implies an inefficient allocation of production capacity and distribution of goods and services. When the market fails, governments have to step in. Rationing the sale of key items such as masks and toilet paper is a good start. Providing these for free, as Singapore did with masks, is even better. The public needs to be assured that there are sufficient quantities of these daily necessities tucked away in the warehouses.

Minister Chan’s berating probably helped make some of the hoarders pause in embarrassment. But, the prompt restocking of empty shelves also helped to stop the frantic supermarket queues. In this case, action and words go well together.

Bernard Tong is the CEO of The Edge Singapore and EdgeProp Singapore

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