The Purpose of Prices
In an article at National Review, Thomas Sowell explains why price controls are a bad thing:
This often comes up in the area of pharmaceuticals. It is expensive to produce drugs. On average, it costs $800 million to produce a new drug, according to Sowell's article. Canada has price controls on drugs. It still costs the pharamaceutical company $800 million to produce the drug, but now it can only charge $10 per bottle, meaning that a lifetime supply for people who have the condition the drug treats runs around $1000. If only 50,000 people have the condition, that's a mere $50 million, well short of the cost to produce the drug. The only way the pharmaceutical company can make money is to sell its product to a country which doesn't have price controls for a much higher amount, say $800 a bottle. And thus, US residents pay a lot more than Canadian residents. What would happen if the US paid the same price, either by buying the drugs through Canada, or by instituting price controls here? Well, then, either Canada's drug prices would go up, or the company would go out of business, and the drug would no longer be available. Certainly, no other company would have the incentive to produce the next wonder drug which cures a disease which only a small percentage of the population suffers from.
The only way to lower prices and to keep producing the wonder drugs is to lower the cost of creating them, and that means taking an entirely different approach. Tort reform--limiting the amount lawsuits could take from drug companies which make good faith mistakes--would go a long way, as a lot of the production cost goes to paying the price when something inevitably goes wrong with another drug. Reducing FDA regulation would do the same. This approach carries its own risk, of course. But everything involves tradeoffs.
Prices force you to limit your claims on what other people have produced to the value of what you have produced for other people. Prices force you to limit how much of product A you buy because you need to keep some money to buy product B.
While prices convey these limitations, they do not cause them. No economy — capitalist, socialist, feudal or whatever — can keep consuming more than it produces. Producing more of product A means using up resources needed to produce product B.
Simple and obvious as all this may seem, politicians blithely ignore it when they promise to make the prices of housing or health care or other things “reasonable” or “affordable.”
Nothing is easier for any government than to impose price controls. Governments have been doing that for thousands of years. What governments cannot control are the underlying realities expressed through prices.
What does the history of thousands of years of price controls tell us?
The first thing undermined or destroyed is self-rationing. When you pay the full price of going to a doctor, you go there when you have a broken leg but not when you have the sniffles or a minor skin rash. When the government makes health care “affordable,” you go there for sniffles and a minor skin rash.
The underlying reality has not changed, however. The doctor’s time is still limited, and the time that you take up with your sniffles or skin rash is time that somebody else with a broken leg — or perhaps cancer — has to wait to get an appointment.
Government-run health-care systems in countries around the world have longer waits — sometimes months — to get medical attention. In other words, the rationing goes on, but more haphazardly, because prices do not force people to ration themselves according to the seriousness of their problem.
This often comes up in the area of pharmaceuticals. It is expensive to produce drugs. On average, it costs $800 million to produce a new drug, according to Sowell's article. Canada has price controls on drugs. It still costs the pharamaceutical company $800 million to produce the drug, but now it can only charge $10 per bottle, meaning that a lifetime supply for people who have the condition the drug treats runs around $1000. If only 50,000 people have the condition, that's a mere $50 million, well short of the cost to produce the drug. The only way the pharmaceutical company can make money is to sell its product to a country which doesn't have price controls for a much higher amount, say $800 a bottle. And thus, US residents pay a lot more than Canadian residents. What would happen if the US paid the same price, either by buying the drugs through Canada, or by instituting price controls here? Well, then, either Canada's drug prices would go up, or the company would go out of business, and the drug would no longer be available. Certainly, no other company would have the incentive to produce the next wonder drug which cures a disease which only a small percentage of the population suffers from.
The only way to lower prices and to keep producing the wonder drugs is to lower the cost of creating them, and that means taking an entirely different approach. Tort reform--limiting the amount lawsuits could take from drug companies which make good faith mistakes--would go a long way, as a lot of the production cost goes to paying the price when something inevitably goes wrong with another drug. Reducing FDA regulation would do the same. This approach carries its own risk, of course. But everything involves tradeoffs.
