Impact of price capping in the market of Covid tests

Submitted to Prof. Tarun Jain
Submitted by: Nishant Ketan Singh (20138) & Srishti Jain (20171)

With the first case of COVID-19 discovered in December’19 in Wuhan, China, COVID came
knocking on India’s doors in January’20. With the first lockdown announced in March’20 in
India, it was clear that rough times lay ahead.
With a sudden outburst in COVID-19 in the Indian subcontinent, the previously controlled RTPCR
and antigen tests were made available to the public. Given that the kits along with their
constituent components were globally in short supply, their prices should have increased in line
with microeconomic laws of demand and supply. But in April’20, Supreme Court of India made
COVID-19 testing in private labs free for people covered under the Ayushman Bharat scheme
and other economically weaker sections of the society while approving the ICMR cap of Rs. 4500
for general private lab tests.
A price-cap on a commodity sets an upper limit on the price, below the free market price, that
the diagnostic tests provider can charge. As microeconomics theory suggests, this price capping
is introduced to protect the consumers from monopolistic exploitation while still maintaining a
profitable business for the provider. It insists the laboratories to improve their operational
efficiency and reduce the costs per test to maintain profit margins.
Although there are several contentions that the price cap set by ICMR was still way above the
actual costs of these tests, there was a marked shortage in availability of these tests for people
to get done freely. The price cap set by the government of India on the RT-PCR tests might have
led to its marked shortage i.e., as per laws of demand and supply considering price caps. This
could have resulted in inefficiencies in the testing market resulting in Q* of diagnostic tests
being less than the optimal quantity and consequently dead weight loss in the total achievable
surplus. In light of this market inefficiency, a possibility of the emergence of a parallel market
for COVID testing is also present.