Question

A pharmaceutical company sells a patented drug in only two countries at significantly different prices. The two countries are considering passing a common law stating that the pharmaceutical company cannot charge different prices in the two countries. An adviser states that this policy could backfire. Explain the possible consequences of this policy and how it could backfire.

Answer 1

There are various factors such as transportation costs, transaction costs, legal restrictions,market structure,import duty etc. due to which prices of same product( pharmaceutical in this case) varies across different countries. Now , consider two countries A & B price of pharmaceutical products is higher in A than B. If the law is passed that same price will be charged for pharmaceutical products across both countries and suppose price in country B is increased due to this law , while company and government may be earning but consumers are the real losers as they are bearing the brunt of high taxes and price. So, this will reduce the demand for that particular product in country B as same amount of bundle is costing more leading to decline in consumer's income and hence demand which will lead to decline in production which further will reduce income and then consumption this will may throw some workers out of the labour force which will increase unemployment and hence all of these will have negative impact on economic growth.