A recent post to this blog raises the issue of externalities associated with the use of antibiotics. The more an antibiotic is used, the greater the selective pressure in favor of pathogens resistant to it. Hence my use of an antibiotic may impose externalities on other people by making the drug less effective for them, which looks like an argument for legal restrictions on antibiotic use.
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.
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.
13 comments:
Typically, antibiotic resistance is countered by giving ever-larger doses, so a patent holder is unlikely to take steps to counter it.
It seems somewhat questionable to refer to a solution that relies on government-enforced monopolies as a "market solution."
I know this wasn't the focus of the post, but it seems odd to mention the negative externalities of antibiotics without mentioning that antibiotics also have positive externalities.
Many infections for which antibiotics are prescribed aren't just "in the air." In order for someone to catch them they must be exposed to a specific micro-organism. Use of antibiotics decreases the total pool of such organisms, and the pool of infected hosts with which to come into contact, and probably the infectiousness of each host. For most people this will lower the probability that they will be exposed to the pathogen in the first place. At least that's my understanding. I don't claim to be an epidemiologist.
The individual using the antibiotic isn't paying for it, typically, at least not directly or fully.
The gradual resistance buildup of pathogens from antibiotic treatment in effect makes that antibiotic a finite resource - we have X doses before pathogens become resistant.
Then it's just a matter of who we distribute those doses to, and why not to those that pay for it?
"The gradual resistance buildup of pathogens from antibiotic treatment in effect makes that antibiotic a finite resource - we have X doses before pathogens become resistant."
It's not quite that simple. When someone takes antibiotics properly, meaning to take sufficient doses to kill the infection completely, the risk of contributing to resistant bacteria is quite small and the antibiotic will remain valuable for a long time.
The problem comes when people start on an antibiotics regimen, but abandon it as soon as they start feeling better. Or, even worse, people who take antibiotics like aspirin, one pill every day whenever they feel slightly under the weather. That is how you breed resistant pathogens.
So, to maximize the effectiveness of an antibiotic, there should be a strong pressure on patients to use them as prescribed. In an extreme case, I could see a vendor demanding that patients check in to their private hospital and stay there until they have finished the regimen. They could even sign a contract authorizing the hospital to keep them locked up or force-feed them the pills if needed, but that's probably not enforceable.
It would be very inconvenient for the patients, but on the other hand they would be almost guaranteed to get an antibiotic which their infection would not be resistent to.
Economist Markus Herrmann has a couple of interesting papers on this topic.
There simply isn't a substantial body of evidence of widespread resistance to even the oldest and most widely encountered antibiotic. Triclosan has been used routinely in soaps, detergents, and other household items since 1972. In all that time there has been no resistant strains of bacteria developed in the wild - although a laboratory test indicates a pathway to resistance exists. Study after study refutes the existence of any actual triclosan-resistant pathogens.
In the fantasies of American Medical Association doctors the use of antibiotics by ordinary persons with the assistance of mere pharmacists may result in calamity. But the reality is that the authoritarians have no claim to actual calamity.
Jim, while triclosan has not yet caused problems with resistant bacteria, it simply cannot substitute for most other antibiotics because you cannot take it internally.
And most other antibiotics have produced resistant strains at some time or another. Why not look at the wikipedia article: http://en.wikipedia.org/wiki/Antibiotic_resistance
At least Friedman admits there's a problem and is thinking about second best solutions.
However, I don't think patenting is a workable "market" substitute for other regulation. The monopolist will still be able to sell much more than works if resistance fails: just look at the sales of lice treatments which no longer work. The monopolist might actually be able to make MORE money if resistance is widespread because (a) bigger doses will be needed and (b) resistant germs will have more time to infect more people, spreading the disease more widely. A sure cure that eradicates a disease does not maximize profits for a monopolist. Where have all the smallpox vaccine customers gone? It would be in the patent holders interest to let partial resistance develop, so that they have a continuous stream of customers. This could be done in any number of legal ways, such as recommending low doses or too brief drug treatments.
The free market will solve the problem the same way it always has--innovation will spawn new cures. Once everybody is getting sick and dying from some new antibiotic-resistant plague, drug companies will try to profit off of this misery by selling the cure for it. Only the Mike Hubens of the world would prefer to hold back progress to spare the inevitable plague, rather than let the plague come and advance medical science forward. So a few people have to get sick and die, sheesh, harden up people.
So, the "market solution" is to let a company regulate it instead of the government?
The essence of libertarian “freedom”?
"The more an antibiotic is used, the greater the selective pressure in favor of pathogens resistant to it."
"There is, however, a market solution to this problem . . ."
Resistance is inevitable (not futile). There is no solution though there may be hacks to alter the time line. It would be better to direct time and energy to ever more sophisticated techniques for selectively altering our microbial environment.
Current antibiotics are blunt instruments that cause many harms by altering our microbiome in significant ways that we have only recently come to understand in part. Unintended effects are thought to include immune system damage, obesity and, well, speculation is rampant. Talk about externalities!
Forgive my ignorance but I don't see why the limited usefulness of antibiotics isn't an incentive for the drug manufacturer to sell as much of the antibiotic as he can and when faced with it's declining effectiveness just switch products?
Even if we were dealing with a company that only made antibiotics, and only a specific type of antibiotics, then wouldn't it still be in their interest to get as much profit as possible and then move on to the next source of revenue rather than trying to extend the sales life of the product?
Or would the two (more sales, shorter period v. less sales longer period) be roughly equivalent economically and thus relying on other pressures (image, media, etc) to encourage your solution?
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