[donaldscrankshaw] Donald: The Purpose of Prices

[Email subscription to blog articles]

Posted by Donald:
The Purpose of Prices
http://www.donaldscrankshaw.com/posts/1172118846.shtml


   In an article at National Review, [1]Thomas Sowell explains why price
   controls are a bad thing:

     Prices force you to limit your claims on what other people have
     produced to the value of what you have produced for other people.
     Prices force you to limit how much of product A you buy because you
     need to keep some money to buy product B.
     While prices convey these limitations, they do not cause them. No
     economy â capitalist, socialist, feudal or whatever â can keep
     consuming more than it produces. Producing more of product A means
     using up resources needed to produce product B.
     Simple and obvious as all this may seem, politicians blithely
     ignore it when they promise to make the prices of housing or health
     care or other things âreasonableâ or âaffordable.â
     Nothing is easier for any government than to impose price controls.
     Governments have been doing that for thousands of years. What
     governments cannot control are the underlying realities expressed
     through prices.
     What does the history of thousands of years of price controls tell
     us?
     The first thing undermined or destroyed is self-rationing. When you
     pay the full price of going to a doctor, you go there when you have
     a broken leg but not when you have the sniffles or a minor skin
     rash. When the government makes health care âaffordable,â you go
     there for sniffles and a minor skin rash.
     The underlying reality has not changed, however. The doctorâs time
     is still limited, and the time that you take up with your sniffles
     or skin rash is time that somebody else with a broken leg â or
     perhaps cancer â has to wait to get an appointment.
     Government-run health-care systems in countries around the world
     have longer waits â sometimes months â to get medical attention. In
     other words, the rationing goes on, but more haphazardly, because
     prices do not force people to ration themselves according to the
     seriousness of their problem.

   This often comes up in the area of pharmaceuticals. It is expensive to
   produce drugs. On average, it costs $800 million to produce a new
   drug, according to Sowell's article. Canada has price controls on
   drugs. It still costs the pharamaceutical company $800 million to
   produce the drug, but now it can only charge $10 per bottle, meaning
   that a lifetime supply for people who have the condition the drug
   treats runs around $1000. If only 50,000 people have the condition,
   that's a mere $50 million, well short of the cost to produce the drug.
   The only way the pharmaceutical company can make money is to sell its
   product to a country which doesn't have price controls for a much
   higher amount, say $800 a bottle. And thus, US residents pay a lot
   more than Canadian residents. What would happen if the US paid the
   same price, either by buying the drugs through Canada, or by
   instituting price controls here? Well, then, either Canada's drug
   prices would go up, or the company would go out of business, and the
   drug would no longer be available. Certainly, no other company would
   have the incentive to produce the next wonder drug which cures a
   disease which only a small percentage of the population suffers from.
   The only way to lower prices and to keep producing the wonder drugs is
   to lower the cost of creating them, and that means taking an entirely
   different approach. Tort reform--limiting the amount lawsuits could
   take from drug companies which make good faith mistakes--would go a
   long way, as a lot of the production cost goes to paying the price
   when something inevitably goes wrong with another drug. Reducing FDA
   regulation would do the same. This approach carries its own risk, of
   course. But everything involves tradeoffs.

References

   1. http://article.nationalreview.com/?q=ZmJhMmY2OTE2NmRmMjY5ZmU4ODczNmVkNGM2NDg1ODA=