Antibiotic Resistance, Exernalities, A Market Solution?
There is, however, a market solution to this problem, provided that two conditions hold. The first is that the effect is specific to a particular antibiotic—use of antibiotic A does not increase resistance to antibiotic B. The second is that the antibiotic is patented.
If both conditions hold, the apparent externality is internalized by the patent holder. The more doses of the antibiotic he sells the less effective it becomes, hence the lower the price he can get people to pay for additional doses. So it is in his interest to charge more and sell less than it would be if there were no externality. As in other cases of monopoly (absent perfect price discrimination), the result is not perfectly efficient, economically speaking. But it does convert the externality into a cost of production.
How nearly the first condition holds in practice I do not know; perhaps some readers of this blog can tell me. So far as the second condition is concerned, the obvious problem is the limited duration of patent protection. While the patent is in force, a profit maximizing monopolist will treat increased resistance to the drug during the rest of the patent term as an ordinary cost but ignore or discount any effects thereafter. If, after the patent expires, the market becomes competitive, each firm will treat as an internal cost only effects on the value of what it sells, not effects on the value of what its competitors sell. Hence the result is only imperfectly efficient—how imperfectly depends on how the useful life of a new drug compares to the term of patent protection.
But then, perfectly efficient outcomes, whether through the private or political market, are rarely an option.