Question

1) Read at least three articles. Provide copies of the articles with your assignment if they are different than the articles I provide. You may use the business database for your search. Make sure it is grammatically correct and a minimum full page typed.

2) Look up and understand the definition of prices. Understand how prices move to equate supply and demand in a capitalist economy. Look up and understand the definition of government price controls.

3) Review at least two historical experiences with price controls. (gasoline in the 70s, rent controls from WWII to date, beef controls after WWII, Russia’s price controls, Cuba’s price controls, Venezuela’s price controls, etc.)

4) Write your opinion of the current Drug Shortage situation in the U.S. Cover issues such as: •Do you support government price controls? •Do you think government price controls affect a drug company’s balance sheet, contribution margin, profitability and liquidity? •What are the economic effects of government determined pricing rather than a market determined price? •Is there an effect on supply, demand or manufacturing capacity of affected drugs (manufactured goods)? •What “unforeseen” consequences do you anticipate? •Historically have price controls achieved their desired outcomes? •What would you suggest to help the current situation? •If you want to relate the issue to the lack of Ebola vaccination (or Zika)/treatment options, feel free.

Answer 1

No I do not support government price controls and price controls does affect the drug company’s balance sheet, profitability and liquidity.

Let us the understand the reasons

1. It is estimated that OECD (Organization for economic Cooperation and Development) countries with price regulations on drugs have estimated to have caused losses to pharma companies around $18 billion to $ 27 billion annually.
2. Now these losses affect the research and development spending of the pharma companies as their margins becomes tighter they would decrease their spending on R&D. As developing a new drug involves a lot of investment in terms of R&D and with decreased profitability they would cut back on these investments.
3. These reduction in R&D results in 3 to 4 fewer new molecular entities (NMEs) being developed every year. And these NMEs would benefit consumers.
4. Historical evidence of this is of Clinton administration in 1992/93, which proposed a healthcare plan designed to place caps on the prices of the breakthrough drugs. Around this time Period, market value of the pharma companies decreased and based on 2005 study, which estimated that pharma companies decreased their spending by $1.6 billion because of the price capping.

Economics, unforeseen consequences of the same and historical evidence.

1. Now this is a similar situation to maximum price in economics, where the maximum price is determined by the government. This is particularly done to make the product more affordable and reachable to mass/general population. Disadvantage of this it will lead to lead to shortage, and demand will exceed supply. This will again lead to wait listing and there will also be emergence of black markets as people will pay well above the market price.
2. Historically having price have not attained the desired outcomes as demand of the product increased and the supply was limited thereby giving rise to black market.

Classic example of this during the Second World War, the price of the goods were fixed. This lead to increase in the demand and encouraged people to sell in the black market demanding unprecedented prices well above the market price.

Based on the current circumstances, pharma companies should be encouraged to develop generic drugs and FDA should provide the approval for the same so that the these drugs are within the range of mass consumers.