Are drug prices too high or too low?

This is a common question I receive, often with the implicit assumption that prices in the US are too high. One key question to consider is, what are we trying to optimize? Tyler Cowen has a very good and brief post talking about drug prices and makes the case that (i) the supply of new drugs is elastic and (ii) we want to expand the number of new, high-value drugs that come to market. I’ve excepted the full piece below as I believe it merits a full excerpt.

Recently I have been writing about how the federal government should not go further in bargaining or forcing down the prices of pharmaceutical drugs.  Supply is elastic and the benefits from new pharma drugs are enormous.
But it is not as simple as being “for higher prices.”  There is also a price trajectory over time.  Higher prices today can induce more competition, which can mean lower prices tomorrow, maybe even much lower prices.  If not tomorrow, perhaps five or ten years hence.
Higher prices today can mean greater efforts at price discrimination, including over time.  That too can mean lower prices (compared to the counterfactual) at later points in time, or sometimes today as well.
So yes it is fine to be for higher prices for pharmaceuticals.  But in many scenarios you end up being for lower prices too, just not all the time and just not for everybody.
So shout it from the rooftops: “I am not the demonic Satan, I am for both higher and lower prices as part of a complex mix, to expand elastic supply.”  Catchy, right?

The elasticity of supply is a key concept that likely influences your perception of the drug development process. If you believe drug development is relatively inelastic to price (e.g., NIH will just develop all the drugs), then you may argue for doing as much as possible to lower prices. If you believe drug development is elastic to price (as does Professor Cowen) then you’ll want to consider carefully the tradeoffs of higher vs. lower prices, making sure any price changes are done in a way that does not discourage innovation.

The concept of “elasticity of supply” is certainly technical and not ‘catchy’; however, understanding this concept is critical if you want to be an informed individual when entering into any debate surrounding drug prices.