Question

So, why does the government grant patents? The government knows that these patented drugs will have an inelastic demand, especially if it is a new drug that can potentially save the life of the user. Doesn't that just mean the price will be out of reach for some people? Would we be better off if there were no patents?

Answer 1

Government grant patents because it allows the firms to earn more from the inelastic demand for the product and coverup for the investment it has done in the research and development of the product.

Any drug making firm spends a huge amount of money to invent a new drug. They have to do drug trials, try different combinations of salts etc. All these activities take a huge amount of money. The monopoly which the firm earns in form of a patent help the firm to recapitalize.

IF the patents are not provided the firm researching and developing a new drug will be reluctant to spend such a huge amount of money and R&D activities will decline overall. Patents are the incentive to research a new drug and the supernormal profit motivates the firms to invest in activities which have very high chances of failing and the end result could be huge losses.

Yes, the general public in the short run will be better off when the new drugs and medicines will be available for a cheaper price but in the long run, there will be new diseases or ever-evolving viruses and bacteria but no firm to invest in R&D activities because there is no incentive left to invest in them. The whole burden will fall on the government to fund such activities and will increase taxes.