International Baccalaureate

Extended Essay
Economics

Title: Analysis of the price controls implemented on remdesivir by the

Indian government

Research Question: To what extent have price controls on remdesivir in

India been effective at increasing consumer welfare?

Candidate Code: krq344

Word count: 3908
Table of Contents
Introduction 3
Methodology ………………………………………………………………………………………5
Sources………………………………………………………………………………………………………………………….5

Economic theory……………………………………………………………………………………………………………5

Investigation………………………………………………………………………………………..7
Outline of the issue…………………………………………………………………………………………………….7

Outline of the policies implemented………………………………………………………………………….9

Economic effects of the policy………………………………………………………….11

Impacts on the consumer……………………………………………………………………………………………14

Impacts on the producer…………………………………………………………………………………………….17

Impacts on surplus and welfare…………………………………………………………18

Impacts on consumer surplus………………………………………………………………………………………
21
Impacts on producer surplus……………………………………………………………………………………….21
Welfare
loss......................................................................................................................22

Conclusion…………………………………………………………………………………………24
Appendix……………………………………………………………………………………………26
Bibliography………………………………………………………………………………………29
 Introduction
The global healthcare system faced many challenges during the COVID-19 pandemic. There

were multiple countries struggling to cope with the surging number of patients and provide

them with ample medical attention. With demand growing rapidly, there became a scarcity of

special treatments and medications for the virus, which consequently led to a significant

increase in the prices for these treatments.

During the COVID-19 pandemic, the Indian government put the ECA (Essential Commodities

Act) of 1955 into effect, a policy that enabled the government to regulate production, supply,

and pricing of essential medications, including drugs such as remdesivir. The government set a

price cap for these drugs and ordered pharma companies to comply with the cap, aiming to

make COVID-treating medications and treatments accessible and affordable to many.

Furthermore, the government utilized the ECA to start taking measures such as fast-tracking

approvals, giving manufacturers financial incentives, and using the latest tech to expedite the

production process. All of this helped in distributing the drugs and treatments much faster

throughout the country, and in abundance. Hence, this led me to the research question “To

what extent to have price controls on remdesivir in India been effective at increasing

consumer welfare?”

There are many reasons why this topic is important, one being that the COVID-19 pandemic has

had far-reaching effects and social, health and economic impacts. Governments around the

world have had to take multiple unusual measures to control the spread of the virus and

provide medical assistance to those affected by COVID. In addition, the pandemic has helped

expose many issues with the current healthcare systems around the world, and how affordable
and accessible most drugs are for people. Policies executed, such as by the Indian government,

have been aimed at efficiently distributing medications in an affordable way for the country’s

population.
 Methodology
Sources:
The majority of the external information mentioned within this essay is secondary data. This

data has been gathered by respected news outlets such as Reuters, CNBC, Business Today, The

Times of India, etc. The validity and accuracy of the data and information provided within the

several articles from these outlets are quite adequate in terms of reaching the correct

conclusion to the research question. Moreover, sources such as The Times of India are Indian

news outlets themselves, hence they are considered to be more trustworthy as they have direct

knowledge of what is occurring within the country. Primary data has also been included, using

information from an interview with my aunt, who is a doctor in India.

Economic theory:
The fundamental concept of supply and demand can be used to show how price controls can

affect the equilibrium quantity and price for remdesivir and other essential drugs. Furthermore,

the shifts in the demand and supply curves can be used to explain the impacts on consumers

and producers. Price controls, in addition, is a simple concept that allows a deeper

understanding to nurture so that you can see how markets are influenced just by a price cap or

a price floor. In addition, externalities will also be mentioned in this essay, as it will be explored

how events such as the rise of black markets and exorbitant pricing of remdesivir and other

products by manufacturers has a negative impact on societal welfare.

Welfare economics is a branch of economics that primarily focuses on examining and exploring

the welfare of the main stakeholders in a market, i.e. consumers and producers. This essay will

use the sources and discuss the impacts of said policies and discuss to what extent do these
policies protect and possibly increase the welfare for consumers and producers. Furthermore,

this essay will also examine the consequential impacts on society from things such as the rising

of black markets and illegal trade for remdesivir. The concept of government intervention links

in with this as well, as the essay will explore how the government’s decisions to implement

certain policies as well as the quickness of their reactions can benefit society and help protect

societal welfare.
 Investigation
Outline of the issue:
One of the drugs that achieved recognition for its effectiveness against COVID-19 was

Remdesivir. The drug was manufactured by Gilead Sciences Inc., and was used in treatment for

Ebola. It was also discovered during its research that remdesivir was “effective against viruses in

the coronavirus family, such as Middle East Respiratory Syndrome (MERS) and Severe Acute

Respiratory Syndrome (SARS)” (NIH, 2020). This research gave scientists an advantage in the

fight against the virus. Trials began with the drug in February of 2020, and researchers were

able to confirm by April of that year that the drug was indeed effective and resulted in

“accelerated recovery” for patients infected with the virus (NIH, 2020).

After the US Food and Drug Administration (FDA) gave the drug emergency use authorization to

treat patients, governments around the world commenced in an intense race to secure their

own supplies of this drug. With a sharp increase in demand, concerns emerged over whether or

not the supply of the drug was adequate, and individuals around the world began to question

the drug’s availability and affordability.

India was one of the worst hit countries during the pandemic, with nearly 45 million cases

registered in total as of 2023 (Worldometer, 2023). The country, known for its generic

pharmaceutical production, plays and has played a pivotal role in the multiple pharmaceutical

industries around the world. The rising demand of remdesivir and the increasing COVID cases in

India meant that challenges appeared in the provision of the drug and the government had to

ensure that people throughout the country were able to access and afford it.
Actions from other countries had its own negative effects on the accessibility and affordability

of remdesivir. In June of 2020, Trump’s government secured a supply of 500,000 vials of the

drug from Gilead Sciences Inc., as a response of surging cases in the US. This resulted in a

shortage of the drug around the world, as this meant that Gilead’s July output and 90% of

August and September had already been given to the US (CBS, 2020).

Due to the surge in demand and the shortage of supply for remdesivir, illegal trades started to

come into play. According to one case, an individual had to pay $533 for one 100 mg dose of

remdesivir, which was almost ten times the market price. Since adult patients were supposed

to receive six vials in total, the individual had to pay a total of $3200, which “only a small

percentage of people in India could hope to afford” (CBS, 2020). This was extremely worrying

for the Indian population as many of them had been severely affected by the virus and not all of

them had sufficient financial strength to afford and access remdesivir.

Outline of the policies implemented:
Amidst the rise of both demand for remdesivir and COVID cases, Indian policymakers

acknowledged the need to ensure equal access for every individual that needed the drug.

Furthermore, they felt the urgency to prevent exorbitant pricing to occur and cause an

inequality of access between the higher and lower income population. Hence, the Indian

government felt it necessary to take immediate action in response to these issues.

The Indian government’s first response was to invoke the Essential Commodities Act (ECA) of

1955. This meant that the Indian government could implement measures to ensure

remdesivir’s availability. Some of these measures were fast-tracking regulatory approvals,

giving financial incentives to manufacturers and utilizing the best technology to step up

production. Furthermore, India waived any import duties, allowing faster responses in a surge

for demand, as well as reducing the financial burden on healthcare institutions and the general

population. A mix of these policies further enabled the Indian government to bolster the

production of remdesivir and ensure its availability to the mass public, whilst protecting

consumer welfare.

Recognizing the impact of unregulated pricing on remdesivir, state governments such as

Maharashtra introduced an immediate price cap on remdesivir, with the Minister stating “the

COVID-19 drug should be available at a rate anywhere between Rs. 1,100 to Rs. 1,400” (NDTV,

2021). Furthermore, the Indian government met with the seven main manufacturers of

Remdesivir in April of 2021, and revised the prices of each manufacturer’s version of the drug

as well as discussed methods to expedite production.

As a response to the rise of black markets and illegal trades for the remdesivir drug, the Indian

government began to conduct raids and crackdowns in several cities across the country. This

led to the arrest and disbandment of many groups that were unethically distributing and selling

the remdesivir drug, usually at exorbitant prices. In addition, the government ensured that

manufacturers and hospitals had means of direct distribution of the drug between them,

preventing any middlemen to take advantage of the short supply for the drug. They also

conducted public awareness campaigns, and the general public became more careful to

purchase their medications from verified healthcare institutions only.

 Economic effects of the policies
The main aims behind all of the policies implemented and the several measures taken by the

Indian government was to protect the general consumer’s interests and ensure that they had

equal and affordable access to all medications required by their loved ones. This meant that

every policy had to ensure it was improving remdesivir’s affordability and accessibility, as well

as ensuring pharma companies and manufacturers don’t suffer a loss through this.

The current supply that India had for remdesivir was not sufficient in matching with the

demand for the drug. As a response, the government held a meeting with the seven main

manufacturers of remdesivir in India to discuss prices and how to increase supply. Appendix 2

shows the pre-revision and post-revision prices of each manufacturer’s remdesivir drug.

Figure 1: A supply and demand diagram to show the effects of lower prices - based off of Appendix 2
The market equilibrium rests where S and D meet, at P 1Q1. After the government discussed new

pricings and the prices were capped, the average price of Rs. 4,400 fell to a new average of Rs.

2,800. Lower prices meant producers were discouraged from producing higher outputs, hence

they began to produce at Q2. However, according to basic economic theories of supply and

demand, a drop in the price of remdesivir meant that the quantity demanded would be much

higher than Q2. This quantity is shown by Q3, hence the shortage is now shown by the gap

between Q3 and Q2. B is known as the socially optimal output, where MSB = MSC. Thus, it can be

inferred that the price cap has generated a welfare loss of area ABC, negatively impacting

people in India.

However, as seen in Appendix 1, there is a massive surge in cases in April 2021. The average

vials demanded by the population increased drastically. Although there is a surge in the number

of cases in India, manufacturers continued to produce at a low output, as producing high

quantities at lower prices will not benefit them and instead incur a loss, since the revenue

won’t cover the production costs. This causes a major shortage of remdesivir across India.

Considering the severity and the significance of the shortage, the Indian government, with the

authority granted by the ECA, proceeded to give fast-track approval to the construction and

openings of multiple facilities belonging to six of the seven manufacturers to help increase

supply. According to BusinessToday, the capacity of remdesivir was 3.88 million vials per

month, before meeting with the government. After the meeting, with the authority of the fast-

track approval, there was an addition of seven new facilities, each having a capacity of 1 million

vials per month. Furthermore, there was a 3 million vials per month plan lined up to take into

effect after the seven new facilities are installed. In total, the production capacity of remdesivir
would increase significantly from 3.88 million to nearly 7.8 million vials per month, post-

government intervention.

Figure 2: A diagram to show the increase in supply

Most of the aspects in this diagram remain the same from Figure 1. However, due to fast-track

approval given by the Indian government, the supply curve S shifts to the right and forms a new

curve, S1. This increase in supply consequently results in a higher quantity supplied for the drug,

as manufacturers have access to more facilities and can produce more without increasing their

costs of production significantly.

Impacts on the consumer:
In the short term, the price drop was significantly beneficial for consumers, as they were able to

access life-saving drugs such as remdesivir at a relatively low price which they could afford. The

government had waived import duty on remdesivir, hence manufacturers had low production

costs and were indirectly encouraged to import the drug into India so that quantity supplied

could match demand. Consequently, prices for remdesivir were lowered, as manufacturers

didn’t have any costs that they needed to pass on to the consumers.

In the long term, however, this proved to be disastrous for the country. The effectiveness of

remdesivir in helping cure COVID-19 saw a strong demand for the drug since the beginning of

the pandemic in 2020. The manufacturers were still producing at the natural quantity and were

hesitant in producing higher outputs due to low prices. Consequently, supply didn’t match

demand – according to Appendix 4, it can be inferred that the number of vials required for one

patient to be fully medicated is 6. Using data from Appendix 1, the number of cases in May

2021 was around 8.78 million, meaning nearly 52.5 million vials were demanded that month.

However, according to BusinessToday, as of April the supply stood at only 3.88 million. This

showed that there was a shortage of nearly 48.7 million vials.

Black markets had both positive and negative impacts for consumers in India. Since goods like

remdesivir are merit goods, black markets act as a secondary market and provide access to the

drug for consumers unable to source it in the primary market. This helps in reducing the

shortage as well as helping more patients in the country. However, black markets tend to price

these goods significantly higher than the prices in the primary market. This worsens the effects
of income inequality within society, with the drug becoming unaffordable for low income

individuals and leaving them with no access to the medication.

Although the lower price made remdesivir much more affordable for the population, the supply

that was currently available in India was still not enough to match the demand. This worsened

the existing shortage of the drug and had negative impacts on consumers. However, after

manufacturers of remdesivir received fast-track approval to launch new facilities for

production, the shortage was reduced.

In the short term, the increase in supply helped stabilize the prices for remdesivir significantly.

Furthermore, the stabilization of prices as well as the increase in supply helped the Indian

government achieve both of their primary goals – to keep remdesivir accessible and affordable

for the entire population. As can be seen in Appendix 1, the beginning of June saw case

numbers starting to plateau. Additionally, according to Cipla’s Global CFO, the complaints he

received for supplies and ‘the number of panicky calls’ he got reduced significantly after the

increase in supply. This can mainly be seen due to remdesivir becoming much cheaper, which

meant that a larger proportion of the population were able to access it.

In the long term, the increase in supply ensured a consistent availability of the drug. This

further prevented any shortages arising, hence securing accessibility of remdesivir for

everyone. Additionally, the increase in supply meant that the market will always have a strong

supply and there will always be alternative manufacturers for consumers to buy from if one of

the manufacturers are in a shortage. This market competition can lead to prices falling even
lower post-government intervention and enabling access to an even larger proportion of the

Indian population.
Impacts on producers:
Before government intervention, manufacturers were producing at the quantity that the

market naturally dictates. After the surge in demand, manufacturers were unable to charge

higher prices due to the price cap, and were unwilling to produce a higher output at low prices.

Hence, supply remained the same. However, after fast-track approval was given, they were able

to increase supply whilst retaining substantial revenue.

In the short term, the price drop due to government intervention was bad news for

manufacturers. In order to match demand for remdesivir, they had to produce larger quantities,

now at an even lower price than before. This discouraged manufacturers, as they felt that they

couldn’t incur losses if they produced high quantities and sold them for prices that wouldn’t

cover the production costs. Hence, the supply remained the same, and did not meet demand.

In the long term, however, after fast-track approval was given, manufacturers were

comfortably able to produce a higher output. Since approval was given for the construction of

multiple new facilities, this meant manufacturers could keep production costs the same whilst

producing a higher output of remdesivir, helping reduce the shortage as well as eliminate any

losses for producers.

 Impacts on surplus and welfare
Consumer surplus is an economic concept that represents the monetary benefit consumers

gain when they purchase goods at a price lower than the highest price they’re willing to pay.

Similar to consumer surplus, producer surplus is a concept that shows the monetary benefit

producers gain when they sell their goods at a price higher than the lowest price they’re willing

to sell for.

Figure 5: A S&D diagram showing surplus

The market equilibrium lies where the curves S and D meet, at P 1Q1. The consumer surplus is

the area marked by A, and the producer surplus is the area marked by B. Together, they show

the market’s total economic surplus at equilibrium. The larger the area of either surplus, the
more benefit the consumers or producers gain from their transactions within the market.

Additionally, these surpluses can be adjusted in area by shifts in the demand or supply curve,

which affect the equilibrium quantities and prices.

Figure 6: A S&D diagram showing the impacts on surpluses from the price cap

Before government intervention, consumers had a surplus of area A+D and producers had a

surplus of area B+C+E. However, as the average price of remdesivir in India dropped from Rs.

4,400 to Rs. 2,800, consumer surplus gained area C and lost area D. Producer surplus suffered a

loss of areas C and E.

The drop in price meant that quantity demanded shifted from Q 1 to QD. However, as discussed

before, low prices discouraged manufacturers to produce higher quantities, hence the quantity

supplied, QS, was lower than Q1, causing a shortage. Consequently, the total social surplus

becomes area A+C+B, with area D+E showing a welfare loss.

Impacts on consumer surplus:
The price drop post-government intervention came as great news for consumers. The market

experienced an immediate increase in consumer surplus of area C, allowing consumers to

purchase the same quantity of goods for a much lower cost. Furthermore, the price drop

helped increase consumer welfare, as they now paid less than what they were initially willing to

pay for remdesivir. The lower prices consequently resulted in consumers’ demand for the drug

increasing, as they enjoyed the satisfaction from knowing they can afford life-saving drugs like

remdesivir much easily now than before.

Consumer surplus, however, also suffered a loss of area D. Even though lower prices meant that

some consumers were now able to afford remdesivir, there were still some consumers that

couldn’t access the drug. This was simply due to the fact that there wasn’t enough supply of the

drug at the capped price to satisfy all customers.

Impacts on producer surplus:

The price drop meant that producer surplus incurred a loss of areas C and E. The price drop also

meant that manufacturing firms were less profitable, earning a revenue of P 2QS, which was

much smaller compared to P1Q1. The loss in revenue and drop in price discouraged producers

and they became unwilling to produce at a higher level of output, mainly due to fear of high

production costs at higher output levels.

Welfare loss:

Figure 7: An externalities diagram showing the impacts of black markets

The market equilibrium is where the supply and demand curve meet, at P 1Q1. The demand

curve is also annotated as the marginal private benefit curve (MPB). Additionally, the supply

curve is annotated as the marginal private cost (MPC) and the marginal social cost (MSC). The

curve MSB represents the marginal social benefit.

The positive externality comes from the consumption of remdesivir, a merit good, that provides

society with many benefits, one of the main being the monetary benefit it provides. According

to the National Library of Medicine, vaccines save around ‘$500 billion in medical expenses and

hospital stays.’ However, MSB exceeds MPB in this diagram. This implies that there is an under-

allocation of resources within the market, which creates a welfare loss of area A+B. This area
represents the benefits not reaped by society due to the misallocation of resources in the

market.

Black markets act like secondary markets within a country. When the primary market was

suffering from a shortage of remdesivir, the secondary black market was provided as an

alternative for consumers to purchase from. However, the black market charged prices

astronomically higher than the primary market. According to BBC, prices for remdesivir reached

around Rs. 40,000 – nearly 10 times higher than what was charged in the primary market.

Although high prices theoretically reduce demand, in the instance of remdesivir, a merit good,

black markets were beneficial. Even though lower-earning individuals couldn’t afford to

purchase and access it, black markets became a useful alternative for consumers with higher

incomes to purchase and access remdesivir, thus helping reduce the shortage of remdesivir.
 Conclusion
In conclusion, this essay has explored the question “To what extent have price controls on

remdesivir in India been effective at increasing consumer welfare?”

It can be concluded that India has been quite hectic and unorganized in their policy

implementations. Their implementation of a price cap, for instance, has caused a lot of both

positive and negative impacts for both consumers and producers. However, although they

made remdesivir more affordable and accessible, they were not prepared for the shortage that

the price drop would result in, and hence the country had to suffer through a massive shortage.

According to Worldometer, around 140,000 Indians died from COVID in May 2021. Comparing

this to the US, another country that was impacted significantly, US only recorded around 17,000

deaths in May 2021.

Additionally, the growth of black markets came as good and bad news for consumers. It meant

that there was an additional supply of remdesivir which consumers that needed the drug could

access. These illegal markets helped reduce the shortage of remdesivir and offered access to

consumers that could afford to purchase remdesivir for high prices. This meant that high-

income individuals were much better off as they could easily access the drug and afford it

comfortably. However, this left low-income individuals to stick to the primary market, where

there was already an ongoing shortage of the drug.

It can also be concluded, however, that India has been quite effective at increasing consumer

welfare. Actions such as giving fast-track approval for new production facilities meant that

there was a strong supply of remdesivir available for the patients in India to access for their
treatments. Furthermore, alongside the price cap, the Indian government was able to achieve

both of their primary goals – to make remdesivir affordable and accessible for the entirety of

the population that needed it.

Overall, I believe that, on its own, price controls would have lead to more significant issues than

what they already resulted in. However, due to complementary policies and actions that lead to

an increase in supply, the consequences of this mistake was averted – in 2021, only 79.6% of

the Indian population was vaccinated. Nonetheless, the implemented policies resulted in 89.4%

of the population being vaccinated by the end of 2022 (BioSpectrum, 2023).

 Appendix

Appendix 1:

Total COVID-19 cases in India from Feb 2020 to August 2023 | Source: Worldometer
Appendix 2:

Prices of remdesivir before and after govt. intervention | Source: Dept. of Pharmaceuticals National Pharmaceutical
Pricing Authority

Appendix 4:

An interview with my aunt, who is a doctor

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