When the Government Breaks Your Legs and Hands You Crutches
Emily Jackson explores the reasons behind the ongoing generic drug shortage in Canada at thestar.com. She lists three main causes of the current crisis: a single supplier for many essential medications, government-mandated price controls on generic drugs, and the lack of a nation-wide drug strategy. She correctly points out that “the low prices have forced Canada’s health-care system into its one-supplier situation, which can, ironically, wind up being more expensive than paying more in the first place.” Here’s why.
Prices are determined on the unhampered free market by the interplay between supply and demand. Prices also influence supply and demand. When a consumer’s good is in high demand, people are willing to pay more for it. This results in profits for the entrepreneur. Profits influence the entrepreneur to increase production and attract competitors to the business thereby increasing supply. The increase in supply then reduces the price and profit margins of the entrepreneur thereby decreasing production. The converse example of a consumer’s good in low demand is also true. These competing forces result in a tendency for prices to gravitate toward the costs of production.
Ontario’s Ministry of Health requires that generic drugs cost 25 per cent of their brand-name counterparts. Similar price caps (with varying percentages) exist across the country.
What, then, is the result of government price controls on generic drugs by legal fiat? Shortages. The lower price results in increased demand and subsequent consumption, which diminishes supply. In addition, the lower price discourages production as profit margins are decreased or eliminated altogether, driving marginal producers out of the business. This is why there is only a single supplier of injectable generic drugs in Canada.
The irony here is that the drug shortages brought about by government price controls is exactly the problem the Ontario Ministry of Health sought to fix by implementing them in the first place.
Harry Browne said: “government is good at one thing: it knows how to break your legs, hand you a crutch, and say, ‘See, if it weren’t for the government, you wouldn’t be able to walk.'” This is where the notion of a national drug strategy fits in. The idea of the government imposing fines on generic drug manufacturers for supply chain disruptions caused by government interference in the first place is absurd and serves as an additional barrier to entry into the market.
The mess is enough to tempt oneself to medicate, if only the drugs could be supplied.
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About Gregory Cummings
Gregory Cummings writes about Canadian monetary and economic policy. His writing has been featured at the Ludwig von Mises Institute of Canada and the Ludwig von Mises Institute's Mises Daily publication. Read more.