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A General‐Equilibrium Analysis of Public Policy for Pharmaceutical Prices

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  • CHRISTINA M. L. KELTON
  • ROBERT P. REBELEIN

Abstract

Retail sales of prescription drugs totaled $154.5 billion in 2001 and will likely exceed $400 billion by 2010. This paper contrasts the welfare and distributional effects of the current patented‐monopoly system with those of (1) a price ceiling on pharmaceutical products and (2) a universal insurance program covering pharmaceutical purchases. We use a version of the Kelton and Wallace (1995) two‐good, general‐equilibrium monopoly model in which a license is required to produce one good. Individuals have heterogeneous preferences, but are otherwise identical. Results indicate potential welfare gains for both the price‐ceiling and universal‐insurance policies, with very distinct distributional effects.

Suggested Citation

  • Christina M. L. Kelton & Robert P. Rebelein, 2007. "A General‐Equilibrium Analysis of Public Policy for Pharmaceutical Prices," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 9(2), pages 285-318, April.
    • Handle: RePEc:bla:jpbect:v:9:y:2007:i:2:p:285-318
    DOI: 10.1111/j.1467-9779.2007.00308.x
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