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A General-Equilibrium Analysis of Public Policy for Pharmaceutical Prices

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Retail sales of prescription drugs totaled $154.5 billion in 2001. The National Institute for Health Care Management estimates annual sales will exceed $400 billion by the year 2010. This paper analyzes the welfare and distributional effects of two policy families that could be used to cope with high and rising pharmaceutical costs. We employ a general-equilibrium approach to contrast the current patented-monopoly system with a) a price ceiling imposed on the pharmaceutical sector of the economy; and b) a universal insurance program covering pharmaceutical purchases. We use a version of the Kelton and Wallace (1995) monopoly production environment: a two-good general-equilibrium model in which a license is required to produce one of the goods. Individuals in the model are heterogeneous with respect to preferences, but have identical production technologies and labor resources. Results indicate potential welfare gains for both the price-ceiling and universal-insurance policies, with very distinct distributional effects.

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Paper provided by Vassar College Department of Economics in its series Vassar College Department of Economics Working Paper Series with number 78.

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Date of creation: Nov 2005
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Handle: RePEc:vas:papers:78

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  1. Erik Canton & Ed Westerhout, 1999. "A model for the Dutch pharmaceutical market," Health Economics, John Wiley & Sons, Ltd., vol. 8(5), pages 391-402.
  2. Xiangkang Yin, 2000. "A tractable alternative to Cobb-Douglas utility for imperfect competition," Working Papers 2000.10, School of Economics, La Trobe University.
  3. 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.
  4. Yin, Xiangkang, 2001. "A Model of Shareholder Discounts," The Economic Record, The Economic Society of Australia, vol. 77(236), pages 89-102, March.
  5. 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.
  6. Amy Finkelstein, 2003. "Health Policy and Technological Change: Evidence from the Vaccine Industry," NBER Working Papers 9460, National Bureau of Economic Research, Inc.
  7. Bednarek, H.L. & Pecchenino, R.A., 1999. "A Macroeconomic Analysis of Publicly Funded Healthcare," Papers 9905, Michigan State - Econometrics and Economic Theory.
  8. 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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