Health Care, Technological Change, and Altruistic Consumption Externalities

31 Pages Posted: 14 Sep 2006 Last revised: 20 Sep 2014

See all articles by Tomas Philipson

Tomas Philipson

University of Chicago; National Bureau of Economic Research (NBER)

Stéphane Mechoulan

Dalhousie University

Anupam B. Jena

Harvard University; National Bureau of Economic Research (NBER)

Date Written: January 2006

Abstract

Traditional economic analysis has proposed well known remedies to deal with consumption externalities and inefficient technological change in isolation, but lacks a general framework for addressing them jointly. We argue that the joint determination of R&D and consumption externalities is central to health care industries around the world generally, and for the pharmaceutical industry in particular. This is because technological change drives the expansion of the health care sector and altruism seems to motivate many public subsidies such as Medicaid in the US. We stress that standard remedies to the two problems in isolation are inefficient -- Pigouvian corrections to consumption externalities are inefficient under technological change and standard R&D stimuli are inefficient because they focus only on consumer and producer surplus, not the altruistic surplus accruing to non-consumers. We provide illustrative calculations of the dynamic inefficiency in the level of US R&D spending due to the inability of innovators to appropriate the altruistic surplus. We find that altruistic gains amount to about a quarter of consumer surplus in the baseline scenario. Our analysis implies that total R&D could be under-provided by as much as 60 percent.

Suggested Citation

Philipson, Tomas J. and Mechoulan, Stephane and Jena, Anupam B., Health Care, Technological Change, and Altruistic Consumption Externalities (January 2006). NBER Working Paper No. w11930. Available at SSRN: https://ssrn.com/abstract=876033

Tomas J. Philipson (Contact Author)

University of Chicago ( email )

Graduate School of Business
1101 East 58th Street
Chicago, 60637

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Stephane Mechoulan

Dalhousie University ( email )

6100 University Avenue
Halifax, Nova Scotia
Canada

Anupam B. Jena

Harvard University ( email )

1875 Cambridge Street
Cambridge, MA 02138
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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