A General-Equilibrium Analysis of Public Policy for Pharmaceutical Prices

Christina M.L. Kelton (chris.kelton@uc.edu) and Robert Rebelein (rebelein@vassar.edu)
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Christina M.L. Kelton: College of Business, University of Cincinnati

No 78, Vassar College Department of Economics Working Paper Series from Vassar College Department of Economics

Abstract: Retail sales of prescription drugs totaled $154.5 billion in 2001. The National Institute for Health Care Management estimates annual sales will exceed $400 billion by the year 2010. This paper analyzes the welfare and distributional effects of two policy families that could be used to cope with high and rising pharmaceutical costs. We employ a general-equilibrium approach to contrast the current patented-monopoly system with a) a price ceiling imposed on the pharmaceutical sector of the economy; and b) a universal insurance program covering pharmaceutical purchases. We use a version of the Kelton and Wallace (1995) monopoly production environment: a two-good general-equilibrium model in which a license is required to produce one of the goods. Individuals in the model are heterogeneous with respect to preferences, but have identical production technologies and labor resources. Results indicate potential welfare gains for both the price-ceiling and universal-insurance policies, with very distinct distributional effects.

Date: 2005-11
New Economics Papers: this item is included in nep-hea and nep-reg
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Related works:
Journal Article: A General‐Equilibrium Analysis of Public Policy for Pharmaceutical Prices (2007)
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