Drug Reimportation Economics

Almost every day it is possible to read a suggestion or comment about the issue of drug reimportation. In nearly every case, the result displays a confidence in economic understanding unjustified by the content. This is understandable, although unfortunate, because the economics of drug reimportation is complex and multi-faceted, even if significant simplifying assumptions are made. Just about the only certainty is that when someone suggests an approach and doesn't accompany it with pages of valid economic explanation, you can be nearly sure that the approach suggested will not be an overall, long term solution.

Since I'm not going to try my own multi-page explanation here, the following is an example of a superficially attractive suggestion, and at the end, a relatively reasonable reference is supplied.

From the August 30, 2004 issue of BARRON's, in the Mailbag section, Mary K. Kelley of Sierra Madre, CA writes :

The problem with the costs of new drugs and treatments developed in the United States is that while Americans pay the full cost of developing them, foreigners get the use and benefit of them. Since most foreign countries have price controls on drugs and treatments, they pay essentially nothing for the development costs. Foreign governments and peoples are essentially free riders. I suggest that all drugs developed by U.S. drug companies be subject to an excise tax when they are sold abroad. The tax revenue could be used to offset the development costs and lower the costs for the U.S. consumer.

For simplicity, just list the categories of the errors involved in this suggestion.

The reference is Drug Reimportation: The Free Market Solution by Roger Pilon of the Cato Institute, and the full pdf file referenced is required reading.

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