The Australian Pharmaceutical Subsidy Gambit: Transmuting Deadweight Loss and Oligopoly Rents to Consumer Surplus / Mark Johnston, Richard Zeckhauser.

Format:

Book

Author/Creator:

Johnston, Mark.

Contributor:

National Bureau of Economic Research.

Zeckhauser, Richard.

Series:

Working Paper Series (National Bureau of Economic Research) no. w3783.

NBER working paper series no. w3783

Language:

English

Subjects (All):

Pharmaceutical industry--Econometric models.

Pharmaceutical industry.

Pharmaceutical policy.

Subsidies--Econometric models.

Subsidies.

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

The Australian Pharmaceutical Subsidy Gambit

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1991.

Cambridge, Mass. : National Bureau of Economic Research, 1991.

Summary:

Australia pays less than other developed nations for her pharmaceuticals, about 45% as much as the United States. She achieves this result with an ingenious price-contingent subsidy scheme, which turns deadweight loss (due to pricing above marginal cost) into consumer surplus. Pharmaceutical companies are offered a per unit subsidy from the government for selling their product at marginal cost in the Australian market. The subsidy is calibrated to enable the companies to recover what they would otherwise receive in monopoly profits. When two or more firms possess market power for a particular therapeutic use, the subsidy scheme creates a game -- in effect a race -- to determine who joins first and reaps most of the benefits. Properly constructed, the game transfers significant oligopoly profits to the consumer. Australia's success -- she reaps benefits equal to 15% of its drug expenditures stems in part from her small size and geographic isolation. She can free ride on drug research, and can work her scheme almost without notice.

Notes:

Print version record

July 1991.