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February 23, 2005



What is the purported special characteristic of drugs that could justify controlling their prices?

Abiola Lapite

You tell me!


High demand-price inelasticity? i.e. if you need a life-saving medicine, you need it, regardless of the price, so the demand won't go down much as the price goes up. One could argue that since demand is basically fixed, the price will go through the roof, and so to prevent people having to pay through the nose to stay alive (or be free of whatever disease the drug cures), one should fix the price as a "reasonable" level.

Well that's just a suggestion... that is something that is unique about drugs, or life-saving drugs, anyway. (I suppose this is similar to the rationale for price controls water, food, etc. in the wake of natural disasters...)

I guess there are other ways to keep drug prices down besides fixing prices - eg heavy bargaining by a middleman who buys huge quantities of the drugs (the Wal-mart way). I've heard that suggested as a means to supply cheap antiretrovirals to AIDS sufferers in the Third World.


"High demand-price inelasticity"

Yeah, but that oughta show up in the consumer surplus estimate - the more inelastic demand, cp, the higher the consumer surplus for a given p/q. I haven't read the paper yet, but it will be interesting to see if there's a break down by type of drugs along the life-saving vs. placebo-for-new-disease-of-the-week lines (or high elasticity vs. low elasticity).

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