Headline : Price controls can do more harm than good Editorial 3rd Sep’19 Livemint
Logic behind pricing of pharmaceutical products:
- Many healthcare products such as pharmaceutical drugs require years of research and millions of dollars to develop.
- Even after that, there is always the risk of a new medicine failing to pass human trials.
- As an incentive for research and risks, such firms are granted patents for their formulations that let them charge high “monopoly” prices if and when they are launched.
- The actual cost of making drugs, however, is typically only a tiny fraction of the retail price. So, once the initials costs have been recovered over the span of some years, these tend to yield bumper profits.
Government caps life-saving drugs:
- In case of life-saving drugs, a government would be justified in capping their prices in the public interest.
- Ensuring the cheap availability of old but essential drugs is easily done without any adverse consequences for public health.
- So long as their cost of production is lower than the price caps—which is usually the case—companies would keep selling them.
Proposed government price control on a new list of hygiene products:
- The government is considering bringing essential products such as sanitary napkins and hand wash agents under its price control regime.
Correct objective but wrong method:
- The objective is to make such products affordable to people at large, so that basic hygiene standards are upheld and nobody’s health suffers.
- This is a noble cause, but the method that has been suggested to achieve the aim is not appropriate.
Companies should be able to price their products:
- If the role of pricing products is taken away from companies in markets with vastly differing dynamics, the results could be poor.
Market will ensure correct pricing of products:
- For example, sanitary pads sell in varying grades of quality, offering women with varied budgets a range of options.
- The market for these products is not short of competition.
- The competition between companies to increase sales is enough to guarantee that no single brand can get away with charging too much.
- When there is demand for cheaper variants, a new entrant would fulfil it, which would push existing brands to contain costs and reduce prices.
Price caps lead to products going out of market:
- A price cap imposed on a product can make it unremunerative for its manufacturers to sell, leaving them with no choice but to pull out of the market.
- Seen in the case of coronary stents:
- An example of this is visible in the Indian market for coronary stents used in heart surgeries.
- Some makers of specialized and other premium stents have withdrawn their stents from Indian market in response to a state-ordered price ceiling.
- Selling these at lower rates, they say, does not make commercial sense for them.
- As a result, according to various surgeons, patients in need of superior stents are forced to make do with cheaper alternatives that risk exposing them to health complications.
Government intervention will discourage innovation:
- In contrast to the market determination of prices, an arbitrary maximum retail price set by the government would distort the market by turning innovative products (that use expensive input materials) unprofitable.
- If choice of premium products is not available, it would spell a net welfare loss for Indians.
Government can intervene by subsidizing customers:
- As for the poor cannot afford even the cheapest available sanitary pads unaffordable, the government could intervene in other ways.
- For example, it could use public funds to subsidize low-cost napkins for mass distribution.
- In general, it is best to rely on market forces to have people’s needs met.
- The government’s heart may be in the right place, but price caps in open markets are likely to do more harm than good.
GS Paper III: EconomySection : Editorial Analysis