Showing posts with label Inelastic Demand. Show all posts
Showing posts with label Inelastic Demand. Show all posts

Monday, October 14, 2013

Inhaling Inelastic Demand

The Times had a great piece in yesterday's paper which illustrated yet again how the relative inelasticity of demand in many health care markets leads directly to unfair pricing and erosion of consumer surplus.

Unlike other countries, where the government directly or indirectly sets an allowed national wholesale price for each drug, the United States leaves prices to market competition among pharmaceutical companies, including generic drug makers. But competition is often a mirage in today’s health care arena — a surprising number of lifesaving drugs are made by only one manufacturer — and businesses often successfully blunt market forces.

Exactly right. With only one manufacturer, the sole supplier can set his price way above the natural equilibrium of the market. That's why in cases like this the government needs to step in to improve market efficiency.

Of course, as Stiglitz points out many times in his book, the government doesn't actually do that and, instead, makes the problem worse.

Thanks in part to the $250 million last year spent on lobbying for pharmaceutical and health products — more than even the defense industry — the government allows such practices. Lawmakers in Washington have forbidden Medicare, the largest government purchaser of health care, to negotiate drug prices. Unlike its counterparts in other countries, the United States Patient-Centered Outcomes Research Institute, which evaluates treatments for coverage by federal programs, is not allowed to consider cost comparisons or cost-effectiveness in its recommendations. And importation of prescription medicines from abroad is illegal, even personal purchases from mail-order pharmacies

“Our regulatory and approval system seems constructed to achieve high-priced outcomes,” said Dr. Peter Bach, the director of the Center for Health Policy and Outcomes at Memorial Sloan-Kettering Cancer Center. “We don’t give any reason for drug makers to charge less.” 

And taxpayers and patients bear the consequences.

In trying to find common ground in this day and age of hyperpartisanship, we should look to the very simple solution of government actually doing its job as opposed to succumbing to special interests. This is where critics on the right always misread the left and it has to stop. As a Democrat, I don't want "bigger" government. I simply want better government and that means no more lobbying.

Let's just do that first and then we can worry about the size of government.