AIDS Drugs are Not Public Goods

Senator Bernie Sanders (I-Vt.) floated a creative proposal to make AIDS drugs cheaper in the United States. He would eliminate patents for some AIDS drugs but give a prize to the companies that discover and develop them. These drugs would then enter the generic market, where their prices would be closer to their manufacturing costs, meaning they would be much cheaper than they are today. In other words, taxpayers would largely pay the drug companies, not patients, insurers, or AIDS Drug Assistance Programs. Sanders' plan would largely shift AIDS drugs from being "private goods" to being "public goods."

It is in our interest to give drug companies a sufficient incentive to invest in new AIDS drugs. To do so under the current patent system, drug companies must be able to price their AIDS drugs well above production costs to a large segment of customers to cover the expense of research and development. Pharmaceutical companies charge American patients a high price for AIDS drugs while charging African patients a low price. Why? Price discrimination. Americans are generally rich and Africans are generally poor; most Africans couldn't afford a high price.

I'm not aware of Senator Sanders using this language, but he is essentially saying that AIDS drugs are, or should be, public goods. Public goods are things like parks and national defense that are generally provided by government (i.e., taxpayers) and made freely available to everyone, regardless of their ability to pay. These new generic AIDS drugs wouldn't be completely free, but they would be close to it.

According to the Concise Encyclopedia of Economics (available for free on the Web),

"One of the best examples of a public good is national defense. To the extent one person in a geographic area is defended from foreign attack or invasion, other people in that same area are likely defended also. This makes it hard to charge people for defense, which means that defense faces the classic free-rider problem. Indeed, almost all economists are convinced that the only way to provide a sufficient level of defense is to have government do it and fund defense with taxes."

Public goods, like parks and national defense, are usually nonexcludable and have nonrivalrous consumption. Private goods don't match those criteria. If the two of us have one hamburger in front of us, only one of us can eat the whole thing, so our consumption is rivalrous. The restaurant we are sitting in can exclude customers who don't pay for hamburgers. We can see that hamburgers are not public goods--they don't fit either criterion--while national defense is a public good because it fits both criteria. Are AIDS drugs public goods? No. They are both excludable (you only get them if you pay for them) and they are rivalrous (only one of us can take that one tablet of Atripla). By trying to shoehorn AIDS drugs into the public good mold, Senator Sanders is simply trying to make taxpayers pay for yet one more thing.

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