The Problems of Protectionism: Another Prescription Drug Scandal

In econ 101, we teach that when the government intervenes in a market to keep prices above marginal costs, it will encourage all sorts of undesirable and harmful rent-seeking behavior. This is one reason that all right-thinking economists are strong opponents of tariffs and quotas that can raise the price of things like shoes, shorts, and steel by 20-30 percent above the competitive market price.

Given what we teach in econ 101, it is very difficult to explain why economists are not more concerned about things like patent protection for prescription drugs. This form of protectionism raises the price of drugs by several hundred percent, or even several thousand percent, above the marginal cost of production. Drugs that would sell for $20-$30 a prescription in a competitive market often sell for $300-$500 per prescription when they have patent protection.

When the government creates this sort of opportunity for large rents, economic theory tells us to expect corruption. The NYT gives an interesting account of one way such corruption occurs. A New York doctor was arrested in March for promoting "off label" uses of a prescription drug.

The basic point here is that drug companies have to get the FDA to approve their drugs for specific uses. The FDA assesses the effectiveness and safety of the drug for the purposes that the company wants it to be prescribed. Drug companies can then promote their drug, subject to required warnings, only for the uses that the FDA approves. However, doctors are free to use their judgment to prescribe a drug for other "off label" purposes, if they believe it is appropriate for these purposes.

This is the problem. Drug companies make enormous profits when they sell more drugs at huge mark-ups. While they cannot legally promote their drug for any purpose other those explicitly allowed by the FDA, they can of course dispense information about new research on their drug. Hence the story of the doctor being arrested for promoting off label uses. He was getting large fees from a drug company to give talks about the off label use of its drug.

I know nothing about the issues in this case other than what appears in the NYT article. But, as a believer in the market, when it comes to government bureaucrats trying to restrict such health endangering practices, versus the pharmaceutical companies that stand to make billions, my money is on the pharmaceutical companies. Of course, if economics were an honest profession, there would be many more economists yelling about the inefficiency and corruption that result from patent protection in the pharmaceutical industry, than the losses from a 10 percent tariff on textiles.

--Dean Baker

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