The latest Fortune (Nov. 1, 2004) (subscription required) has a column by Geoffrey Colvin on how "Both candidates are on a drug trip to fantasyland" over the issue of re-importation from Canada.

In a few words, he neatly sums up the problem: Pharmaceuticals are an industry that requires massive investment to produce the first pill, then only pennies each to produce the next zillion. So the system is that U.S. consumers pay for the investment, then foreign governments bargain with the drug companies, pushing the price down toward marginal cost and free riding on the original investment by the U.S. consumers.

This is exactly what Canada does, by controlling prices so they are 70% lower than those in the U.S. So politicians who want to force re-importation so as to lower prices believe that "by enacting a law, they can make the U.S. a free rider on itself. In fantasyland, no one would have to pay for drug development at all."

He continues: "The real issue is the excruciating choice between higher drug quality and availability on the one hand, and lower costs on the other. In the real world, where nothing is free, you can't have both." (Except I disagree with his use of the adjective "excruciating" to describe a trade-off that is simply inherent in the nature of the world.)

Colvin could have pointed out that pharmaceuticals are not the only fantasyland around. Debate about all kinds of content and delivery systems -- music, movies, publishing, software, games, file-sharing, TiVo, and so on -- is permeated with the same type of delusion -- that because the marginal cost of distribution is so low, content should be dirt-cheap, and we should all get to free ride, ignoring the cost of creation.

Years ago, I heard a radio interview with noted economist and de-regulator Alfred Kahn, in which the professor was finally moved to say to his economically illiterate torturer, with infinite weary exasperation in his voice, "But we can't all of us subsidize all of us; the world simply does not work that way."

posted by James DeLong @ 9:56 AM | General

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