Why is Traditional Economic Theory Not Applicable to the Market for Pharmaceutical Goods and Services?

The applicability of economic theory to markets for pharmaceutical goods and services poses many challenges as it is not easily applicable.? While there is no doubt that healthcare is an important part of the economy as it accounts for about 20% of GDP, healthcare has several factors that cause it to deviate from traditional economic theory.? A perfect economic model allows for the exchange of goods and services based on 2 curves that intersect at equilibrium, supply and demand.? If the supply of a good or service is scarce, this will cause the cost of the good to increase until the demand for that good levels off to meet the available supply.? Conversely, if the supply of the good were excessive, this would cause producers to produce less, which would cause the cost to drop to stimulate demand enough to head back to equilibrium.? There are a couple primary reasons the market for pharmaceutical goods and services do not follow this.

Government Involvement

The first is government involvement.? Governments actions has a severe influence on markets in two main ways, price controls and incentives.? If the government sets the maximum price of what can be charged for a service keeping the cost artificially low, this causes an increase in demand due to the lower cost which can cause supply shortages and prevent attaining equilibrium.? Additionally, if the government gives subsidies to incentive production of a good, this can cause a overabundance of supply which may exceed demand which also breaks the supply demand curve and prevents equilibrium.

Insurance Companies

The second issue is insurance companies.? Since the final consumer never sees or realizes the full cost of healthcare, this causes an increase in demand for healthcare which may exceed the supply available which can cause shortages and cause long waits for treatment.? This is similar to what happened in the UK with government intervention of their health care sector which causes many shortages.

In the end, the only way for healthcare to follow a typical economic model would be to eliminate government involvement, eliminate insurance companies, and go to more of a cash-based system allowing the system to meet an equilibrium of supply and demand.? However, this is not likely to occur as there would be many who have no access to care due to affordability, which would strain the population.? ?