Government Granted Monopolies Lead to Corruption: The Case of Prescription Drugs

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Sunday, 25 November 2012 08:44

There is a large economic literature that shows how trade protection, which might raise the price of products by 15-20 percent, leads to political corruption. The argument is that the beneficiaries of this protection will use their political power to try to maximize the rents they get from this protection.

For some reason economists have not shown the same concern over the granting of patent monopolies which can raises the price of the protected product many thousand percent above the free market price. This is especially an issue in the case of prescription drugs. Drugs that would sell for $5-$10 per prescription as generics in a chain drug store instead sell for hundreds or even thousands of dollars per prescription because of the government granted patent monopoly. The matter is complicated further by the enormous asymmetry in knowledge: the drug company knows much more about their drugs than doctors or patients.

The Washington Post has an excellent front page story that documents how drug company abuses in the research process have been a growing problem over the years. Unfortunately when discussing solutions it does not consider the idea of just taking the financing of clinical trials out of the hands of the industry as proposed by Nobel Laureate Joe Stiglitz. This idea was introduced into legislation earlier this year by Senator Bernie Sanders.