Vanishing Capacity

There is freedom within
There is freedom without
Try to catch the deluge in a paper cup
--Crowded House

Capacity in service sector operations is often difficult to accurately pinpoint. It depends less on facility area and more on operating constraints imposed by managers. For instance, the number of customers that a thousand square feet of restaurant space can serve depends on the number of tables positioned in the layout--something that prior to the current pandemic was primarily at the discretion of the establishment's managers.

Regulations for post-lockdown reopening of businesses are dramatically reducing operating capacities in many facilities. In particular, social distancing rules that force more space between employees, customers, et al. are effectively decreasing potential for productive output from many service sector operations.

Sticking with the restaurant example above, some facilities are being forced to remove every other table from service in order to comply with social distance requirements, effectively cutting the number of customers that can possibly be served in half. In addition to restaurants, many retailers, schools, healthcare, and other service sector operations that previously thought they had plenty of production space are now discovering that they don't have enough.

Capacity is vanishing.

It should go without saying that these regulations upset the economics of many service sector enterprises. Yes, many businesses are now being permitted to open. But if the rules restrict operating capacities below the minimum efficient scale necessary to recoup costs, then one of two things is likely to happen.

Either prices of many service sector outputs are going up, or many service sector operations are going under.