Extended Producer Responsibility for Pharmaceuticals

Abstract

Problem definition: We investigate the effectiveness of different Extended Producer Responsibility (EPR) implementation models for pharmaceuticals. In particular, we study two viable and prevalent models: (i) Source Reduction (SR), where a form of fee upon sale is imposed on producers, and (ii) End-of-Pipe Control (EC), where producers are made responsible for the collection of unused pharmaceuticals. Academic/Practical Relevance: The existing literature on EPR implementation models have primarily focused on non-consumable products (e.g., electronics), while there is limited research on the effectiveness of different EPR implementation models for pharmaceuticals used in practice. We aim to fill this gap in this study. Methodology: We develop a game-theoretic model to characterize the equilibrium strategies of different stakeholders under both SR and EC models, and compare the resulting producer profit, environmental/social impact and total welfare. Results: In contrast to the non-consumable contexts where the SR model is shown to maximize total welfare, the EC model leads to a higher total welfare for certain categories of pharmaceuticals because of its effectiveness in eliminating over-prescription. Moreover, we characterize conditions under which stakeholder (e.g., producer, environmental/social advocacy groups) preferences towards EPR implementation model choices are (mis-)aligned. We further show that limiting the social planner's budget surplus under SR can eliminate the preference misalignment but leads to a loss of total welfare. Managerial Implications: 1) Policy makers should be cautious about directly applying preferred EPR models from other product categories to the pharmaceutical setting. 2) The EC model maximizes the objectives of all stakeholders for a salient category of pharmaceuticals with high health benefits, high collection costs and high environmental/social costs. 3) Policy makers should give thought to differentiating EPR implementation models across pharmaceutical categories. 4) It is important to carefully quantify the health impact of the pharmaceuticals and the operational cost parameters to inform policy making.

Keywords: Extended Producer Responsibility, Pharmaceuticals, Environmental Policy, Social Welfare