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An Economic Analysis of Bernie Sanders' NY Times Piece on Drug Pricing

Saturday, March 11, 2017 10:01
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(Before It's News)

Bernie Sanders offers President Trump some advice in this NY Times opinion piece.  The Senator goes on to single out UCLA for making millions from selling a drug patent to a for profit drug company.  Senator Sanders bemoans that U.S tax payer dollars (through NIH grants) paid for the basic research and then the new private property (the patent) was sold by UCLA to a drug company who turns around and sells the drug for $130,000 per year/patient.  Mr. Sanders worries that the same issue will play out again in the case of a Zika Virus vaccine.

This discussion raises several interesting issues;

1.  If the National Institute of Health (NIH) does provide research grants to academic scientists, does this cover the full cost of the basic research?  

2.  If the NIH required that any discoveries are “public property”, would excellent people enter the science field?  Would universities build labs for these scientists?    What is the optimal distribution of costs and benefits to facilitate innovation without “price gouging” for the end drugs discovered?

At USC today,  the best buildings on campus are new labs (not for the Econ department!).  These labs are meant to attract superstar scientists who then do great things in these labs.  In this case, private $ is being raised to attract stars who then collect public NIH and NSF grants.  

Bernie Sanders is implicitly assuming that the supply of talent to innovation and the effort invested by scientists would not decline if the marginal revenue from such activity declines.  So, in the language of economics; he believes that the supply curve of innovation is inelastic.  How does he know this?

In econ 101, we teach the efficiency/equity tradeoff. It sounds as if that  Bernie Sanders is willing to sacrifice some innovation in order to have “fairer” drug prices (and thus greater equity).  But, does he know how much innovation we would sacrifice?   It is well known that the U.S is the main global driver of innovation.  If new drugs improve our quality of life and extend our life expectancy, then how much do we lose if we pursue Bernie Sanders' well intentioned ideas?

I would have greater respect for the NY Times if they had published next to his piece a counter-point featuring a drug company CEO explaining how his/her company's innovation efforts would be affected by Bernie Sanders' new “rules of the game”.

Senator Sanders is so passionate that many young people appear to believe that his ideas represent a “free lunch”.   Economists play a key role here as we anticipate the unintended consequences of such activism.    


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