Chapter 5: Mechanisms to encourage price competition in the pharmaceutical market and their effects on efficiency and welfare
J. Rovira Forns and J. Darbà Coll INTRODUCTION Mainstream economics presupposes that the market is, in conditions of perfect competition, an automatic mechanism for resource allocation that leads to allocative efficiency, that is, allows the maximization of consumers’ welfare with available resources. On this basis, liberal economists tend to defend that public powers should abstain from intervening in or regulating the market, assuming that the result of any intervention will distort resource assignation and cause efficiency and welfare losses for society. Nevertheless, even those economists who are most staunchly in favour of the free market acknowledge that there are situations in which laissez-faire, the inhibition of the public powers, is not the best course of action. The first of these situations consists of what is known as market failures; in other words, cases in which the market does not give an efficient response: public goods, externalities, information asymmetry and so on. In these cases, there is widespread consensus in the discipline that public intervention is necessary to reach an efficient solution. However, this does not mean that just any sort of intervention is justified, as there may be problems or failures in the public regulation, causing the result to be worse than if there had been no intervention. As the saying goes, in terms that are curiously relevant to the matter in hand, sometimes the remedy is worse than the disease. Another case warranting public intervention is when in reality the conditions for perfect competition are not fulfilled, for example,...
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