The rise of speakeasy gyms during the coronavirus lockdown

In my ECONS102 class, several of the examples I use to illustrate the supply and demand model involve trading of illegal goods and services (like illicit drugs). It is important to realise that prohibition (making certain goods and services illegal to trade) doesn't eliminate the market, it just pushes the market underground. So, I found this recent NPR Planet Money story interesting:

My friend Evelyn is an immigration lawyer, and she recently had a meeting at a foreign consulate in downtown San Francisco. (Her work makes it hard for her to talk to reporters, so we're not using her last name). As she walked toward the building's metal detectors, the security guards told her she couldn't bring her backpack in, so she had to leave. She worried this would make her late, so she frantically began searching for a safe place to stash it. She walked down the street, and her eyes caught a gym storefront with one of those garage-style, roll-down metal doors. It was slightly open...

"Oh, we're not open," said one of the trainers.

What Evelyn uncovered can only be described as a speakeasy gym. You know, illegal, hush hush, like the underground bars during the Prohibition era. These underground gyms appear to be popping up everywhere, from LA to New Jersey.

One fitness freak in Ann Arbor, Michigan, turned to Reddit to get their fix. "Anybody want a home gym partner or know of a speakeasy gym?" they asked — assuring readers in a follow-up post, "not a cop." "That is exactly what a cop would say," responded someone in the thread.

Welcome to the COVID-19 Prohibition era, when gym rats have gone underground.

Governments can legislate all they want, but prohibiting stuff with eager buyers and sellers is super hard, says Jeffrey Miron, an economist at Harvard University who has spent three decades studying prohibitions. Miron, who these days is legally working out in his basement, says there's a simple lesson that emerges from his studies: "Prohibitions don't eliminate things. They drive them underground." And that comes with a whole host of unintended consequences...

This a textbook example of a classic unintended consequence of prohibition, Miron says. When markets get pushed underground, quality control tends to go down. In the case of drugs, this means potentially finding rat poison in your weed. When it comes to gyms in the COVID-19 era, it means potentially creating fitness environments that are even more likely to spread the virus than if they were legal and regulated. "When you drive something underground, your ability to regulate it goes away," Miron says...

Higher prices are another classic unintended consequence of prohibition. With less competition and higher risks in black markets, entrepreneurs can charge extra. The money-making opportunities of black markets lead to other classic side effects of prohibition: violence and corruption. "Disputes tend to be resolved violently because the participants in an underground market can't sue each other in state or federal courts," Miron says. Mobs and gangs function as quasi-governments that use violence to keep order and enforce property rights. But it's hard to imagine illegal gym operators turning to Tommy Guns and gang warfare to resolve their business disputes.

Putting aside the issue of gang warfare between rival illegal gym operators, let's consider the effects of prohibition on the market for gym services. First, let's assume that there are stiff penalties for gym operators who open during a lockdown, but no penalties for gym members who attend the illegal gym. This situation is illustrated in the market diagram below. Without the lockdown, the market operates in equilibrium with a price of P0, and there are Q0 gym memberships. Penalties for gym owners who operate during the lockdown increases the costs of gym operation, shifting the supply curve up from S0 to S1. This increases the equilibrium price of gym services to P1 (the higher prices noted in the quote above), and the number of operative gym memberships decreases to Q1.

Now consider an alternative, where there are penalties for gym owners (as shown above), but also penalties on gym members who flout physical distancing rules by attending the gym. In this case, not only is there a decrease in supply (from S0 to S1), but there is also a decrease in demand (from D0 to D2), because gym members face the risk of being penalised if they are caught. Assuming that the penalties on gym members are smaller than the penalties on gym owners, then the shift in demand would be much smaller than the shift in supply (as shown below). The equilibrium price of gym services increases to P2, and the number of operative gym memberships decreases to Q2. [*]

It would be interesting to see if this point from the article happens:

The longer gym shutdowns last during the COVID-19 prohibition era, the more likely people will evade them. And keep in mind it's summer. Come this fall and winter, millions of workout fiends in cold climates could have fewer legal options to exercise. Speakeasy gyms could have an even greater demand.

That would raise the price of speakeasy gym services even further. Prohibition doesn't eliminate markets - it just pushes them underground.

[HT: Marginal Revolution]

*****

[*] If the decrease in demand was larger than the decrease in supply, then the net effect on the equilibrium price would be a decrease. However, either way, we can be sure that the number of operative gym memberships will decrease.