Friday, February 13, 2015

Pharmaceutical Drug Pricing in China

China has recently dropped their government policy of using price caps (i.e. price ceilings in Prin. of Micro) for low priced pharmaceutical drugs due to shortages of those drugs (as predicted using supply and demand for a binding price ceiling), and has replaced this with requiring firms to set prices based on production costs.  As we see in Prin. of Microeconomics, setting prices based on production costs can also give incentives for firms not to produce since firms will not be able to cover their fixed costs of production.

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