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A General-Equilibrium Analysis of Public Policy for Pharmaceutical Prices

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  • CHRISTINA M. L. KELTON
  • ROBERT P. REBELEIN

Abstract

Retail sales of prescription drugs totaled $154.5 billion in 2001 and will likely exceed $400 billion by 2010. This paper contrasts the welfare and distributional effects of the current patented-monopoly system with those of (1) a price ceiling on pharmaceutical products and (2) a universal insurance program covering pharmaceutical purchases. We use a version of the Kelton and Wallace (1995) two-good, general-equilibrium monopoly model in which a license is required to produce one good. Individuals have heterogeneous preferences, but are otherwise identical. Results indicate potential welfare gains for both the price-ceiling and universal-insurance policies, with very distinct distributional effects. Copyright 2007 Blackwell Publishing, Inc..

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Bibliographic Info

Article provided by Association for Public Economic Theory in its journal Journal of Public Economic Theory.

Volume (Year): 9 (2007)
Issue (Month): 2 (04)
Pages: 285-318

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Handle: RePEc:bla:jpbect:v:9:y:2007:i:2:p:285-318

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  1. Daron Acemoglu & Joshua Linn, 2004. "Market Size in Innovation: Theory and Evidence from the Pharmaceutical Industry," The Quarterly Journal of Economics, MIT Press, vol. 119(3), pages 1049-1090, August.
  2. repec:ltr:wpaper:1999.04 is not listed on IDEAS
  3. Xiangkang Yin, 1999. "A Model of Shareholder Discounts," Working Papers 1999.04, School of Economics, La Trobe University.
  4. Bednarek, Heather L & Pecchenino, Rowena A, 2002. " A Macroeconomic Analysis of Publicly Funded Health Care," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 4(2), pages 243-70.
  5. Amy Finkelstein, 2003. "Health Policy and Technological Change: Evidence from the Vaccine Industry," NBER Working Papers 9460, National Bureau of Economic Research, Inc.
  6. repec:ltr:wpaper:2000.10 is not listed on IDEAS
  7. Yin, Xiangkang, 2001. "A Tractable Alternative to Cobb-Douglas Utility for Imperfect Competition," Australian Economic Papers, Wiley Blackwell, vol. 40(1), pages 14-21, March.
  8. Erik Canton & Ed Westerhout, 1999. "A model for the Dutch pharmaceutical market," Health Economics, John Wiley & Sons, Ltd., vol. 8(5), pages 391-402.
  9. DiMasi, Joseph A. & Hansen, Ronald W. & Grabowski, Henry G., 2003. "The price of innovation: new estimates of drug development costs," Journal of Health Economics, Elsevier, vol. 22(2), pages 151-185, March.
  10. Cowling, Keith & Mueller, Dennis C, 1978. "The Social Costs of Monopoly Power," Economic Journal, Royal Economic Society, vol. 88(352), pages 727-48, December.
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