Economics IA

This article is about a Drug price regulator NPPA fixing a price ceiling on 92 Drug formulation including
those which are used for treatments of cancer, hepatitis C, migraine among others in an attempt to
make those treatments affordable for consumers.

The economic concept ‘Price ceiling’ states that the government set’s a legal maximum price for a
particular commodity to control the maximum prices that can be charged by the suppliers. This is
conducted to limit the seller pricing system, ensure fair business practices and make commodities
affordable to the general public. Since the treatments for these diseases is a necessity for people, the
government decided the equilibrium prices needed to be decreased to make the treatments more
affordable to consumers. To further explain the effect of the price ceiling on the market of drug
formulations the diagram below will be used.

The market was being operated on (Pe, Qe) but as the price Pe was considered high, a price ceiling
was implied by NPPA. Although, this established a persisting market disequilibrium they were able to
lower the price of the good from Pe to Pc. Since the price rationing mechanism would not be able to
able to achieve its rationing function due to the shortage (Qd>Qs), it would give rise to non-price
rationing methods. Non-price rationing methods are methods which are used to distribute goods
when shortages arise in a market. In this market of drugs, the non-price rationing methods would
include first-come-first-serve basis, distribution of coupons to limit the number of drugs being
purchased and favoritism done by sellers to loyal or preferred customers. Although these methods
will help distribute drugs, many consumers will unsatisfied and as these drugs are a necessity for
people it will be vital to their health. It may also lead to the construction of the parallel market as
there will be consumers who will be willing to pay a higher illegal price for the drugs. This will increase
the gap between wealthy and impecunious as the wealthy will be able to pay higher prices to receive
those medications.

Furthermore, the total revenue received by the firms will decrease from (Pe*Qe) to (Pc*Qs). This will
negatively impact the development of vital cures as the producers will have less capital to conduct
research and development to improve the drugs. The producers will lose their surplus area ‘c’ which
will be transferred to consumers and surplus area ‘d’ which will be lost to the welfare loss. Moreover,
as less output is being generated (Qs<Qe) some workers are likely to be fired resulting in additional
unemployment. The government will have no gains or losses in its budget, but they may gain political
popularity among consumers who have benefited through the price ceiling and may be criticized by
the citizens who couldn’t get proper medication for various diseases including cancer, hepatitis C,
migraine and others.

Lastly, a welfare loss can be seen in the graph (b+d), welfare loss represents benefits that are lost to
society because of resource misallocation. This can be determined as with no price control the market
operated at price ‘Pe’ and quantity ‘Qe’ as equilibrium. Consumer surplus was equal to areas ‘a+b’ and
producer surplus was equal to areas ‘c+d+e’. Consumer plus producer surplus is maximum and equal
to areas ‘a+b+c+d+e’. After the price ceiling, the quantity ‘Qs’ is being produced at price ‘Pc’.
Consumer surplus became areas ‘a+c’ and producer surplus became area ‘e’. The total social surplus
became ‘a+c+e’. Comparing social surplus, we can observe areas b and d have been lost and are now
represented as welfare loss. Thus, price ceiling creates a welfare loss ‘b+d’ indicating that the price
ceiling introduces allocative inefficiency due to an under allocation of resources to the production of
the good indicating that society is not receiving enough good to satisfy the demand.

To evaluate, the policy fails as although the price control implemented by NPPA has reduced the
prices of important drugs but they are essential medications for a human body to survive and are not
produced enough in the market as Qd>Qs. In addition to decreasing the scope for further
improvement in drugs, the NPPA has also jeopardized the life of citizens as many citizens would face
severe consequences like death if not provided with these drugs.

Link to article - https://economictimes.indiatimes.com/nppa-fixes-ceiling-price-of-92-drug-

formulations/articleshow/65424679.cms