Question

Critically analyze the pros and cons of putting a price ceiling on prescription medicine. Make sure to use concepts from the chapter in this unit such as government intervention, inefficiencies, price elasticity, etc. in your answer.

1. In the first case, assume the medication is for a life threatening illness for which your child has been diagnosed.
2. In a second case, assume the medication is for an improved quality of life issue, such as achieving a healthy weight.
3. What are the impacts that the pharmaceutical company that makes the medications in question will experience? How will that affect the pharmaceutical company’s production decisions? What about its decisions to conduct further research into new drugs?

Answer 1

At times government interferes in the market and sets the maximum price at which goods can be sold. This is price ceiling.If the price ceiling is above equilibrium price there is no effect on demand and supply .But if the price ceiling is below equilibrium price there will be shortage in the market.In case of the market being competitive,price will be determined by the forces of demand and supply.The market of prescription medicine is not very competitive and the demand for prescription medicine is inelastic .This means that the percentage demand of prescription medicine is less than percentage change in price.So price set by pharmaceutical companies will be high and government intervention in the form of price ceiling is required to bring down the price.

a)If the medicine is for life threatening illness it is necessary to put an end to high prices through price ceiling and make medicines affordable to people .Price ceiling is known to increase access to life saving medicines.

b)As the demand for health care increases cheaper and easily available drugs are required to promote healthy life .Price ceiling thus helps.

c) Imposing price control is good for consumers but manufacturers will suffer loss of revenue as investment will be less.

Price control will stop the development of pharma industry and stop the supply of quality medicine as producers will be reluctant to produce.

Even though price control by the government is well intentioned it will not encourage investment and spending on R&D.