Economic lessons can be applied to the cost of drugs
“The first lesson of economics is scarcity: There is never enough of anything to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.” – Thomas SowellThat pesky free market is again on the outs with Democrats at the State Capitol. And no wonder:- After all, you can’t make a U-turn without seeing a Starbucks.- Teeth-whitening treatments and laser eye surgery are less expensive than ever.- A laptop computer with wireless internet is more powerful – not to mention portable – than all of the technology that first put man on the moon, yet costs less than a month’s pay.- For $50 you can buy a cell phone that takes pictures, keeps your calendar, remembers more phone numbers than you have friends, wakes you up, talks to you and, oh yeah, even makes phone calls.
– And pharmaceutical companies advertise products to alleviate “dysfunctions” that weren’t even mentionable in polite company a few years ago.Clearly, the market just isn’t responding to the public.Enter Senate Bill 89, which has already blazed through the Senate, claiming to prohibit “unfair drug pricing.” Who, in their right mind, could oppose that?Well, maybe two groups of people: those who actually read the bill and those who prefer the American shopping experience to that of, say, Leningrad circa 1980.Proponents of SB 89 assert that it will prevent price gouging by drug manufacturers. The bill allows the top bureaucrat at the Department of Public Health to invoke price controls during a “health emergency.” If that person is a Naderite who seethes with hatred for capitalism and corporations, this bill becomes a bludgeon to punish “greedy drug companies.”When a health emergency is declared, drug companies are forbidden from selling their products at an “unconscionable” price which, according to the bill, means a price that has increased more than 10 percent in 30 days. Price hikes attributed to replacement costs, transportation or taxation are allowed.So, what other factors could cause the price to go up?
Supply and demand.If Colorado were an island, complete with captive drug manufacturers, this price fixing scheme might work for a short time. But Colorado is one of 50 states in a national market.Let’s say a flu epidemic spreads across mid-America. And suppose this happens unexpectedly, without time to crank up production of flu medicine.Supplies of medicine are based on consumption with perhaps enough elasticity to absorb a small increase in demand. If demand surges even higher, the price naturally goes up.In other states, the price goes up 30 percent, but in Colorado it’s capped at 10 percent. Drug manufacturers won’t take their products off the shelves of Colorado stores in order to reallocate them to other states, but when new shipments are available, you can bet that other states will receive proportionately more than Colorado.So one morning, you wake up with the flu, trudge down to the drugstore in search of pharmaceutical relief, only to find that flu medicine is available in Cheyenne, Salt Lake and Santa Fe, but not in Colorado. Now what’s more important: low prices or ample supplies?
Much can be learned from lemonade stand economics: Johnny sells lemonade for 10 cents a glass. “Next door, they’re selling lemonade for five cents,” says Sally. “Won’t you sell me a glass for five cents?””No,” says Johnny, “my lemonade costs 10 cents. If you want to pay five cents, why don’t you buy next door?””Because they don’t have any,” replies Sally. “Well, when I don’t have any,” retorts Johnny, “I sell it for five cents, too.”State Sen. Mark Hillman (R-Burlington) is the Republican leader of the Colorado Senate. His e-mail address is email@example.com.
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