Question

Currently, patents in the U.S. and Canada last 20 years from the date on which the application for a patent is filed. The effective patent on a new prescription drug is about 8 years, as it takes about 12 years to test a new drug for safety and efficacy and get approval from the U.S. Food and Drug Administration or Health Canada. When the patent on a drug expires, any approved manufacturer can produce and sell the drug. (In general, when a drug comes off patent, there are many manufacturers who are approved to sell a generic version. You can assume a competitive market after the drug comes of patent). True, False, or Uncertain: A policy that increased the length of patents for new drugs from 20 to 32 years would result in a decrease in Total Surplus.

Answer 1

True.

The statement that a policy that increased the length of patents for new drugs from 20 to 32 years would result in a decrease in total surplus is correct. This is because as the length for new drugs is increased, the monopoly power in the hands of the manufacturer of the drug will increase. Thus, deadweight loss will increase and thus total surplus will decline. On the other hand, if the length of the drug remains at 20 years, then the market will turn into perfectly competitive soon and thus two total surplus will increase in the economy.