TCS Daily

Prescribe This for the Governors

By Erik Chavez - May 12, 2004 12:00 AM

Being a Kahhlefornia (Pronunciation courtesy of the Governator) native, I thought I left silly governor issues behind me. Little did I know that by accepting the offer to attend the University of Chicago Graduate School of Business that I was also accepting the fact that I would have to face silly governor issues -- again.

The state of Illinois is under siege from the likes of Governor Blagojevich who seeks to import prescription drugs from Canada. Importation of prescription drugs from Canada is fundamentally flawed on many different levels and it will cause negative repercussions in the pharmaceutical market. These negative repercussions will have long lasting and far reaching effects in social welfare in the U.S. and around the world.

The University of Chicago should provide fee waivers to Governor Blagojevich so he can enroll in 33111 taught by Professors Becker, Murphy and Snyder. Perhaps Professor Peltzman might offer to be a personal tutor for the governor and explain the costs of regulation around the issue of importing drugs from Canada.

I will save the discussion of whether the drug prices in the U.S. should be regulated for a later date. Here I will merely discuss the reasons allowing re-importation (as it is referred to in the media) is a horrendous idea.

There are two schools of thought as to why Canadians experience a lower cost of drugs than Americans. One story says that Canadians experience cheaper prices because they have less willingness to pay and have an ability to negotiate better prices with producers. Evidence would suggest that this is probably not the case, as Canada represents a small portion of the world market sales. The more likely story is that the Canadian Government uses its sovereign power to enforce a price ceiling on drugs.

Whichever reason one believes as to why prices in Canada are less than they are in the U.S., there is no reason to allow drugs to be re-imported. If Canadians are able to negotiate better prices or have less willingness to pay, then it should be acceptable that they pay less. Price discrimination is a good thing. In fact, in a market where producers can perfectly price discriminate the market price is equal to the price in a competitive market. By not allowing pharmaceutical firms to price discriminate, which the threat of re-importation does, we are limiting the markets that they choose to participate in. African nations receive drugs at a much lower cost than Americans. Is this wrong? I argue no because Africans have less willingness to pay for these drugs. They and other countries should be able to purchase drugs at a discount relative to the U.S. consumers.

Allowing the re-importation of drugs from Canada sends a signal to drug producers that price discrimination will not be tolerated by U.S. politicians, effectively reducing any incentive drug producers have to provide drugs to anyone at lower costs than Americans pay. In Canada and other developed countries the effect of selling drugs at prices equal to those in the U.S. will not have the tragic effects that it will have in developing countries. The fact that Canadians are against allowing re-importation is a clear indication that they understand economics. Canadians understand that their market price will rise to the prices in the U.S.

Without the ability to price discriminate, low-priced drugs will vanish from the markets of developing countries and people will die. People will die because their low willingness to pay is a mostly a result of their limited wealth and access income.

On the other side of the coin, if Canadians experience a lower cost for drugs because of legislative influence (price caps that the government enforces) it is still a bad idea to allow re-importation. A friend once stated that allowing re-importation of pharmaceutical drugs is like using an old pair of blunt, rusty shears to cut cloth. If the U.S. wants to regulate the prices of prescription drugs then we should do so directly, by passing our own legislation to that effect. Although, this author is adamantly against price fixing it would seem less wrong to fix our own prices rather than import Canadian price fixing. We should not import the public policy of another country in an attempt to regulate our own prices. Doing so is a very crude way to effect policy in the U.S. and just plain foolish.

Perhaps we can cajole the above mentioned professors to donate some time to enlighten the governor about the economics implications of such regulation and the problems which will follow. But then again being an effective and economically sound policy maker usually plays second fiddle to being an effective and resourceful vote getter. I wonder where Gov. Blagojevich's incentives lie.


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