Andrew Mercado and Giorgio Castiglia explain for Discourse how government contributed to the recent baby formula shortage.

The formula shortage demonstrates how regulation often restricts competition, wherever such market-distorting regulations (MDRs) prevail.

The shutdown of Abbott’s Michigan facility due to bacterial growth and “egregiously unsanitary” conditions might have predictably taken one brand of formula off the shelves for a short time. However, the widespread shortages seen today are a function of greater market distortions rather than the temporary shutdown of a single facility.

The primary blame for the formula shortage lies with MDRs. Policies such as smothering tariffs, the WIC program and new product waiting periods, all instituted by Congress, laid the groundwork for this crisis, and the prolonged Abbott shutdown instituted by the FDA made it worse. To avoid similar shortages going forward, the government should avoid policies and regulations that make markets more vulnerable to economic shocks.

Markets work because they align the incentives of producers and consumers, even though each group may be self-interested. Consumers demand the best-quality goods for the lowest prices, and producers want to make the most profit possible. Through the market process, producers vigorously compete for a consumer’s dollars, and since no two consumers have the same preferences, a number of companies emerge, competing to satisfy consumers’ tastes.

When the incentives of producers and consumers become misaligned, generally through government regulatory interference, market participants’ behavior changes, setting off a complex chain of reactions. Calls to increase competition by breaking up some companies or using government funds to subsidize small companies actually don’t promote true competition; rather, they distort incentives for every consumer and producer.

Critical to understanding the formula shortage is that fewer regulations and interventions, rather than more, might have led to a decidedly different outcome. Had incentives and competitive pressures been free from regulatory interference, the shutdown of a single facility would have simply meant one fewer brand to choose from, not a widespread shortage.