As a teacher of economics, I am always looking for good examples of economic illiteracy – a newspaper article or maybe a speech by a politician evincing a deep ignorance of simple economic principles. Unfortunately for me, such pieces are few and far between. Imagine, therefore, my delight when I read the following headline:
At first, I was convinced that the author was just kidding, that this was a good piece of satire. But no. This is serious.
Here are some highlights:
When nearly 100 drugs became scarce between 2015 and 2016, their prices mysteriously increased more than twice as fast as their expected rate, an analysis recently published in the Annals of Internal Medicine reveals. The price hikes were highest if the pharmaceutical companies behind the drugs had little competition, the study also shows.
The authors—a group of researchers at the University of Pittsburgh and one at Harvard Medical School—can’t say for sure why the prices increased just based off the market data. But they can take a shot at possible explanations. The price hikes “may reflect manufacturers’ opportunistic behavior during shortages, when the imbalance between supply and demand increases willingness to pay,” they conclude.
Now, this would all be really funny, if it wasn’t the product of a group of highly respected researchers in medicine from top universities published in a peer-reviewed medical journal. But it becomes a public health issue when people end up making policy conclusions on economic illiteracy:
To combat potentially exploitative hikes, the authors offer a recommendation:
If manufacturers are observed using shortages to increase prices, public payers could set payment caps for drugs under shortage and limit price increases to those predicted in the absence of a shortage.
Yes, you guessed it: price controls are the obvious solution to a shortage-induced price increase. Face, meet palm!