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A Cost-Benefit Analysis of Drug Price Controls in the U.S

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  • Santerre, Rexford
  • Vernon, John

Abstract

This paper uses national data for the period 1960 to 2000 to estimate an aggregate private consumer demand for pharmaceuticals in the U.S. The estimated demand curve is then used to simulate the value of consumer surplus gains from a drug price control regime that holds drug price increases to the same rate of growth as the general consumer price level over the time period from 1981 to 2000. Based upon a 7 percent real interest rate, we find that the future value of consumer surplus gains from this hypothetical policy would have been $319 billion at the end of 2000. According to an earlier study, that same drug price control regime would have led to 198 fewer new drugs being brought to the U.S. market over this period. Therefore, we approximate that the average social opportunity cost per drug developed during this period to be approximately $1.6 billion. Recent research on the value of pharmaceuticals suggests that the social benefits of a new drug may be far greater than this estimated social opportunity cost. Based on empirical findings of the productivity of pharmaceutical R&D over a similar time period, our first approximation of the cost-benefit ratio for this hypothetical price control policy ranges between 62 and 68. This suggests price controls on pharmaceutical prices between 1980 and 2000 would have caused much more harm than good. Society may be better off discovering more efficient ways than price controls to improve access to existing drugs.

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Bibliographic Info

Paper provided by Regulation2point0 in its series Working paper with number 78.

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Date of creation: Nov 2004
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Handle: RePEc:reg:wpaper:78

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