April 29, 2011
The NYT had an article about new research showing that a drug that sells for $50 a dose is just as effective in treating an eye disease as a drug that sells for $2,000 a dose. Why was Medicare and private insurers paying 4000 percent more than necessary to treat this eye disease? Because a drug company (Genetech) has a patent on the expensive drug which allows it charge prices that are far higher than its cost of production.
Economic theory predicts that when government interference in the market allows firms to charge prices above the cost of production, then they will engage in various rent-seeking behaviors to maximize their profits. These rent-seeking actions, like expensive lawsuits and paying off politicians, are a pure waste from an economic standpoint.
Economists usually get very upset when they see this sort of behavior, for example when an import tariff raises the price of a product by 20-30 percent. For some reason economists don’t seem to notice the problem when government granted patent monopolies raise the price of products by several thousand percent above their free market price, even though they can use the exact same graph to show the costs.
The ignorance of economists should not be an excuse for bad reporting. The fact that patent protection is at the root of the problem noted in this article should have been mentioned.
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