Question

Parts A and B contain hypothetical quotes by two unnamed politicians. Using information from this course/textbook, explain why each quote reflects faulty economic reasoning. (Each quote might contain parts that are at least partially true, but when combined, the overall statement is not true).

1. “If we limit the price of drug XYZ to one-third of its current level, we will be harming the very patients we claim to be helping. The company that produces XYZ spent millions of dollars developing and testing this drug, and will almost certainly stop producing it once the price ceiling is implemented.” (Note: assume that this drug is still protected by its patent).
2. “My opponent in Part A is nuts; the company will continue producing XYZ. No one will be hurt by this life-saving legislation, except for the company and its greedy managers and shareholders.” Hint: Can you identify another group of people (stakeholders) who might be hurt by this legislation?

Answer 1

Ans) Part A - By decreasing price to the one third of the current market rate, patient will not be harmed instead they are the person who will be benefited, because if the drug will be supplied at low amount then the overall cost of the medicine will fall as a result the patient who earlier was not able to afford that medicine is now available for him. While there is no government, in the economy who will set the price as low so that even the average variable cost is not covered. The decision of reduction in price will help the the economy another way also, by eliminating the monopoly power which is set by few sellers of drug the reduction in price will decrease their revenue as well as power from the market.

Part B - The people who will be hurt by this legislation will be the researcher ( who is investing their time to cure the patient health of various disease by experiment done by him in laboratory), employees or the worker who are on small post in these industry because by reduction of the price the income of all these people will also be reduced, so they prefer not go on job and enjoy leisure because of the higher level of substitution effect then income effect according to microeconomic theory, this result in increase in unemployment rate as the time spent on inventing new medicine is now not worth as much as earlier.