Pharmaceutical shortages

A vote for price-gouging.

One of the central lessons of an introductory economics course is that there’s no such thing as a shortage in a market where prices are allowed to move freely: there is always some price at which the quantity demanded equals the quantity supplied, though that price may be very high. And the fact that prices rise when supplies are short gives everyone in the system an incentive to hold inventory, thereby reducing the impact of supply shocks.

So how could it be that the US market has chronic shortages of various pharmaceuticals, with the list varying from day to day? According to Gardiner Harris in today’s New York Times, it’s because prices don’t actually adjust, due to an ethic that prevents “price gouging.” (The article doesn’t consider whether there might be legal and regulatory barriers as well; if not, there would be appear to be an entrepreneurial opportunity here for a firm that wanted to hold pharmaceutical inventories on a speculative basis.)

In the rest of the civilized world, shortages are prevented by government intervention. Gardiner quotes Marc Roberts as pointing out that economic theory justifies such intervention in the case of vaccines, since my not being vaccinated puts your health at risk. But the bias against governmental solutions seems to be very strong here, so we’re stuck with a half-assed market system that produces persistent shortages.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact: