Arnold Kling

U.S. vs. Canada Drug Price Wars

Arnold Kling, Great Questions of Economics
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Derek Lowe explains the tiff between U.S. pharmaceutical companies and Canada over drug prices.

What's happening is simple, and seemingly unspeakable: American customers are subsidizing the low prices in Canada. The prices are higher here so they can be cheaper there.

If drug research were manna from heaven, then it would be economically efficient to charge the marginal cost of production everywhere. What happens is that foreign countries impose price controls, so that pharmaceutical companies must pay for their research (which does not come from heaven) out of profits in the United States.

The problem is compounded by re-importation of drugs from Canada. As 'Jane Galt' describes it,

Okay, one million is the number of people who order drugs from Canada. Those are not all people ordering drugs they can't afford. Can't afford is when, after you pay for rent or mortgage, taxes, food, and enough clothing to cover your body, you do not have sufficient cash to pay for your drugs. I'm willing to bet that many or most of those seniors have greens fees, grandchildren's birthday presents, travel expenses, meals out, and assorted other things that could be scaled back sufficiently to cover their drugs if they wanted to. They don't want to pay a lot of money for their drugs;

Discussion Question. If you were a drug company, would you sell your products in Canada?

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