Intellectual Property & External Consumption Effects: Generalizations From Health Care Markets

There is a long-standing literature that recognizes that an efficient solution in correcting a consumption externality is applying subsidies or taxes that align private with social incentives. An equally long-standing literature tackles the appropriate methods of generating the efficient amount of R&D into goods without external effects in consumption, e.g., the analysis of the welfare effects of patent regulations. This paper addresses the joint determination of intellectual property (IP) and externality remedies. We discuss the impact that IP has on remedies for externalities as well as the reverse problem of the impact externalities have on the design of IP. The results are discussed in the context of health care markets in general, and pharmaceutical markets in particular, the latter being one of the most R&D-intensive industries, and at the same time often being faced with altruistic access issues. A central but non-recognized tradeoff in health care concerns the correct R&D incentives when altruistic motives dictate that lives will be saved whenever feasible technologies exist. Understanding this tradeoff is central to understanding the efficiency of the observed growth in health care spending often attributed to technological change. We calibrate the model for the US health care sector and find that altruistic gains amount to 27 percent of consumer gains and that this implies R&D is under-provided by 61 percent in face of such altruistic motives.