FT.com / UK – Medicines shortage fears grow

According to the FT, a triple whammy of falling prices, falling exchange rates and British price controls means British patients face the prospect of drug shortages as it becomes more profitable for pharmacists and wholesalers to sell medicines abroad.

Of course the Government is well-intentioned in trying to reduce the cost to the public of NHS medicines but, as ever, policies must be judged on their results not their intentions: going without would be a catastrophe in many cases.

The following is from “How the Price System Works”, a chapter of “Economics in One Lesson”, by Henry Hazlitt1:

Prices are fixed through the relationship of supply and demand and in turn affect supply and demand. When people want more of an article, they offer more for it. The price goes up. This increases the profits of those who make the article. Because it is now more profitable to make that article than others, the people already in the business expand their production of it, and more people are attracted to the business. This increased supply then reduces the price and reduces the profit margin, until the profit margin on that article once more falls to the general level of profits (relative risks considered) in other industries. Or the demand for that article may fall; or the supply of it may be increased to such a point that its price drops to a level where there is less profit in making it than in making other articles; or perhaps there is an actual loss in making it. In this case the “marginal” producers, that is, the producers who are least efficient, or whose costs of production are highest, will be driven out of business altogether. The product will now be made only by the more efficient producers who operate on lower costs. The supply of that commodity will also drop, or will at least cease to expand.

This process is the origin of the belief that prices are determined by costs of production. The doctrine, stated in this form, is not true. Prices are determined by supply and demand, and demand is determined by how intensely people want a commodity and what they have to offer in exchange for it. It is true that supply is in part determined by costs of production. What a commodity has cost to produce in the past cannot determine its value. That will depend on the present relationship of supply and demand. But the expectations of businessmen concerning what a commodity will cost to produce in the future, and what its future price will be, will determine how much of it will be made. This will affect future supply. There is therefore a constant tendency for the price of a commodity and its marginal cost of production to equal each other, but not because that marginal cost of production directly determines the price.

More on price controls and their effects here.

So, what to do about it? In the first place, change what can be changed quickly to keep medicines available in the UK: cancel the forthcoming price controls. In the second, figure out how to reform the pharmaceutical market so that it functions more effectively as a market to achieve competitive pricing.

[1] The lesson by the way, is this:

[T]herefore, the whole of economics can be reduced to a single lesson, and that lesson can be reduced to a single sentence. The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

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