Question

The government wants more drugs to cure Covid infections, so it forces the P up.

a. What happens to the market for Covid drugs?

b. What benefits will this policy have?c. What problems will this policy present?

d. How would the results be different if the government paid for drugs itself?

e. Which policy (higher P or government paying) do you prefer? Why?

Answer 1

A - The rise in the price of medicine will lead to the rise in the quantity supplied and fall in the quantity demanded as per the law of supply and law of demand respectively.

B - The policy will raise the quanitity supplied as a result of higher price , just as the government desired.

C - Due to higher price , its demand will fall and this medicine may not be accesssible in all the medical centres which will not be good.

D - If the governement will pay for the medicine , the buyers will not have to incur cost , hence the demand for the medicine will increase and shift to right. This will lead to rise in the equulilibrium quantity.

E - I prefer the policy of the government paying for the medicine , so that due to rise in price , demand does not fall and hence the medicine is accessible to all as the positive externality was present which will not be removed and hence the output will rise.