The Australian Pharmaceutical Subsidy Gambit: Transmuting Deadweight Loss and Oligopoly Rents to Consumer Surplus

40 Pages Posted: 31 Jul 2007

See all articles by Mark Johnston

Mark Johnston

Government of the Commonwealth of Australia - Department of Community Services and Health

Richard J. Zeckhauser

Harvard University - Harvard Kennedy School (HKS); National Bureau of Economic Research (NBER)

Date Written: July 1991

Abstract

Australia pays less than other developed nations for her pharmaceuticals, about 45% as much as the United States. She achieves this result with an ingenious price-contingent subsidy scheme, which turns deadweight loss (due to pricing above marginal cost) into consumer surplus. Pharmaceutical companies are offered a per unit subsidy from the government for selling their product at marginal cost in the Australian market. The subsidy is calibrated to enable the companies to recover what they would otherwise receive in monopoly profits. When two or more firms possess market power for a particular therapeutic use, the subsidy scheme creates a game -- in effect a race -- to determine who joins first and reaps most of the benefits. Properly constructed, the game transfers significant oligopoly profits to the consumer. Australia's success -- she reaps benefits equal to 15% of its drug expenditures stems in part from her small size and geographic isolation. She can free ride on drug research, and can work her scheme almost without notice.

Suggested Citation

Johnston, Mark and Zeckhauser, Richard J., The Australian Pharmaceutical Subsidy Gambit: Transmuting Deadweight Loss and Oligopoly Rents to Consumer Surplus (July 1991). NBER Working Paper No. w3783. Available at SSRN: https://ssrn.com/abstract=408183

Mark Johnston

Government of the Commonwealth of Australia - Department of Community Services and Health

GPO Box 9848
Brisbane, QLD 4000
Australia

Richard J. Zeckhauser (Contact Author)

Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States
617-495-1174 (Phone)
617-384-9340 (Fax)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States
617-495-1174 (Phone)
617-496-3783 (Fax)

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