Question

Prescription Drugs: Describe and discuss the political attractiveness of price controls on prescription drugs.

Answer 1

Ans) There is more price variability in the United States (where drug prices are not controlled) than in Italy and there is a tighter correlation between drug prices and quality in the United States than there is in Italy.

- Price controls deliver a mix of costs and benefits. On the benefit side of the ledger (apart from lower prices, which, all else equal, benefits patients) is a lower variance for any given set of drugs in the price of drugs. Most people favor social welfare functions that place a positive value on reducing the financial uncertainty associated with getting sick.

- Price controls deliver such reduced uncertainty by decreasing the variance in the price of drugs.

- On the cost side of the ledger, price controls reduce the availability of the highest quality drugs. In addition, they limit the close link between drug quality and price that is present in a market without price controls. To the extent that developing high-quality drugs is more expensive than developing lower quality drugs, this reduced correlation further undercuts the incentives that pharmaceutical companies face to produce high-quality drugs.

- While some aspects of the debate over price controls are well known, an important contribution of is to highlight the reduction in the variance of drug prices and the reduction in the correlation between price and quality of drugs caused by price controls.