Asymptotically Free Riders

Megan McArdle discusses international aspects of what I call asymptotically free goods. These are goods where the cost is all in up-front research and creativity, with little or no marginal cost of production and distribution. She points out that countries that regulate prices of such goods can take advantage of countries that do not.

That’s right -- right here in the good old USA. You’re paying through the nose for your blood pressure meds so that the French can have cheap Viagra.

By allowing drug manufacturers here to charge more than marginal cost, we enable the manufacturers to fund new research and provide them with an incentive to discover new drugs. Foreign countries regulate the price of drugs, so they get to enjoy the benefits without paying for the research.

I have suggested an alternative way to pay for drug research, that would not involve monopoly drug patents. That is, have the government and/or groups of consumers offer large cash prizes for drug discovery. However, if only the U.S. offered prizes, then other countries would still be "free riders" in the sense that Megan describes.

Discussion Question. Under the current system, suppose that arbitrageurs buy prescription drugs overseas at regulated prices and sell them in the U.S. What will be the long-run impact on drug research?