Price Control Analysis

Price Control Analysis

The prescription drug market is currently experiencing an increase in shortages of prescription medicines as a result of federal government regulations by the FDA. This phenomena is explained in a recent article published in The Wall Street Journal titled "Solving the Growing Drug Shortages," by Dr. Scott Gottlieb. In the article Dr. Gottlieb raises the point that although production costs for drug companies are rising, drug prices are forced to remain the same due to price ceilings mandated by the federal government. This causes shortages within the market due to lack of profitability.

This article appealed to our project because it illustrates the severe effects of price controls as pertaining to consumer and producer in a given market. Price ceilings prohibit producers from reaching the point of equilibrium for the product, which lowers profits and in our instance leads to lower production. For us this circumstance hits home particularly with our grandparents limited supply of necessary medicines.

Pharmaceutical firms strive to reach the equilibrium price to maximize profits where the consumption of the good is met with the production of the good. At this equilibrium price the market clears to yield the highest profits. Graphically this is illustrated in figure PC-1 below. In this graph point E shows the price and quantity at which the market clears in a perfectly competitive market. PC-2 (below) illustrates the effects of a price floor, placed above the equilibrium point, within a perfectly competitive market. Price floors regulate the lowest price a product can sell for, usually resulting in a surplus of that product. A price floor placed below the market clearing price has no effect on the market because the product will be produced and consumed at the market clearing price instead. PC-3 illustrates the effects of a price ceiling, placed below the equilibrium point, within a perfectly competitive market. Price ceilings are placed below the market clearing price resulting in a shortage due to the quantity demanded exceeding the quantity supplied. This is the price constraint that pertains to our project and we will further analyze its effects.

Pharmaceutical companies have experienced consistently tightening regulations pertaining to the manufacturing of prescription drugs resulting in increased manufacturing costs. With no government intervention, rising costs would be met with rising prices for consumers, but in the case of pharmaceutical companies price ceilings prohibit this. The only remaining course of action for drug firms to reduce costs is to limit production, thus causing a shortage in the prescription drug market. The shortage of prescription medications leads to hungry consumers whose needs are not met, forcing these consumers to miss treatment and consequently reduce their standard of living, or in extreme cases looking