This column has been updated to remove reference to and links to an article that has been removed from the Harvard Political Review website.
For many Americans, the price of prescription drugs today is unsustainable. This is why some politicians in Washington are seeking ways to reduce prices. But despite the need for a speedy remedy, price controls are probably off the table. While some people feel price controls are necessary to secure access to life-saving drugs, others argue price controls will only hurt consumers in the long run. Who is correct?
A recent article from the Economist described the danger of price controls. For one, price controls lead consumers to expect goods to remain at affordable prices in the future. Any attempt to lift these controls can be met with great resistance. Controlling prices in domestic markets can also cause price fluctuations elsewhere. Most importantly, price controls distort the market signals that bring supply and demand into equilibrium.
Price controls may also be the best way to balance U.S. drug prices with those of other countries — many of which already use them. In fact, pharmaceuticals throughout most of the world are between two and six times cheaper than in the U.S. Understandably, this price disparity is difficult to accept for many Americans.
The obvious question is, “Why can’t the U.S. implement price controls, too?” Many argue that it could, but not without risking an international shortage of drug development for future generations. Since pharmaceutical companies rely on monopoly prices to cover the development costs of high-risk drugs, it seems the United States is subsidizing lower drug prices for the rest of the world.
To be sure, some evidence shows that companies may stop producing if they face thinner profit margins. But how large do profits actually need to be? The pharmaceutical industry already has the highest profits of any other sector in the United States.
So what would happen if price controls were implemented? First, consumers would grow accustomed to cheap prescription drugs. But expecting drugs to remain affordable might not be a problem in this case. After patents expire, other firms would enter the market to keep prices down. This would allow us to avoid the problem of removing price controls down the road.
Another potential consequence is that drug prices rise in the international market. But existing price controls in other countries make this unlikely in the short run. Prices would most likely remain where they are.
The most important consequence, then, could be insufficient innovation down the road. Such a distortion in market incentives would be an obvious cost of price controls. On the other hand, the market for pharmaceuticals is already distorted since drug companies charge monopoly prices. This means implementing price controls would actually raise social surplus by allowing beneficial market activity to occur.
In the end, implementing price controls would mean substituting one distortion for another. So perhaps the real solution lies in some third alternative, such as a prize system where a sum of money is awarded for the creation of a beneficial drug. Surely, more empirical data is needed on this front.
In the meantime, we have to acknowledge the costs — in human lives — of the current system. The status quo is failing us. And as a society we must choose which is more important: industry profits or saving lives. If the latter, perhaps price controls will buy some time until a better solution can be found.
William L. Somes studies political science and economics at the University of Maine in Orono.