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Health Care, Technological Change, and Altruistic Consumption Externalities

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  • Tomas Philipson
  • Stephane Mechoulan
  • Anupam Jena

Abstract

Traditional economic analysis has proposed well known remedies to deal with consumption externalities and inefficient technological change in isolation, but lacks a general framework for addressing them jointly. We argue that the joint determination of R&D and consumption externalities is central to health care industries around the world generally, and for the pharmaceutical industry in particular. This is because technological change drives the expansion of the health care sector and altruism seems to motivate many public subsidies such as Medicaid in the US. We stress that standard remedies to the two problems in isolation are inefficient — Pigouvian corrections to consumption externalities are inefficient under technological change and standard R&D stimuli are inefficient because they focus only on consumer and producer surplus, not the altruistic surplus accruing to non-consumers. We provide illustrative calculations of the dynamic inefficiency in the level of US R&D spending due to the inability of innovators to appropriate the altruistic surplus. We find that altruistic gains amount to about a quarter of consumer surplus in the baseline scenario. Our analysis implies that total R&D could be under-provided by as much as 60 percent.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11930.

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Date of creation: Jan 2006
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Publication status: published as Journal of Law and Economics Vol. 53, No. 3. The University of Chicago Press. August 2010
Handle: RePEc:nbr:nberwo:11930

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  1. Michael Kremer & Edward Miguel & Rebecca Thornton, 2004. "Incentives to learn," Natural Field Experiments 00289, The Field Experiments Website.
  2. Tomas J. Philipson & Anupam B. Jena, 2005. "Surplus Appropriation from R&D and Health Care Technology Assessment Procedures," Public Economics 0511021, EconWPA.
  3. Tomas Philipson, 1999. "Economic Epidemiology and Infectious Diseases," NBER Working Papers 7037, National Bureau of Economic Research, Inc.
  4. Michael Kremer, 2002. "Pharmaceuticals and the Developing World," Journal of Economic Perspectives, American Economic Association, vol. 16(4), pages 67-90, Fall.
  5. Kremer, Michael Robert & Miguel, Edward A. & Thorton, Rebecca L, 2004. "Incentives to Learn," Center for International and Development Economics Research, Working Paper Series qt9kc4p47q, Center for International and Development Economics Research, Institute for Business and Economic Research, UC Berkeley.
  6. Tomas J. Philipson & Anupam B. Jena, 2005. "Who Benefits from New Medical Technologies? Estimates of Consumer and Producer Surpluses for HIV/AIDS Drugs," NBER Working Papers 11810, National Bureau of Economic Research, Inc.
  7. Joseph P. Newhouse, 1992. "Medical Care Costs: How Much Welfare Loss?," Journal of Economic Perspectives, American Economic Association, vol. 6(3), pages 3-21, Summer.
  8. Parry, Ian & Pizer, William & Fischer, Carolyn, 2000. "How Important is Technological Innovation in Protecting the Environment?," Discussion Papers dp-00-15, Resources For the Future.
  9. Amy Finkelstein, 2003. "Health Policy and Technological Change: Evidence from the Vaccine Industry," NBER Working Papers 9460, National Bureau of Economic Research, Inc.
  10. Wright, Brian Davern, 1983. "The Economics of Invention Incentives: Patents, Prizes, and Research Contracts," American Economic Review, American Economic Association, vol. 73(4), pages 691-707, September.
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Cited by:
  1. Gandjour, Afschin & Chernyak, Nadja, 2011. "A new prize system for drug innovation," Health Policy, Elsevier, vol. 102(2), pages 170-177.
  2. Stéphane Mechoulan, 2006. "Risky Sexual Behavior, Testing and New HIV Treatments," Working Papers tecipa-239, University of Toronto, Department of Economics.

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