Are High Prices Necessary for Innovation?

A Force for Good

Writing in Bloomberg, Megan McArdle says:

America’s high pharmaceutical prices are what compensates pharmaceutical firms for the risk of developing drugs. If we drive them lower, we’ll get fewer new drugs….After a few years of obscene profits, most of these innovations will be pretty cheap and widely available. Every useful weapon we decide not to try to produce for that arsenal comes at a cost to future people’s health.

Megan’s argument is a common one, and is often used to justify government-granted monopolies through patients. Although it pains me to do so, I must disagree with her here.

Drug research certainly is expensive, but as David Henderson and Charles Hooper point out, regulatory burden is also a major cost for firms:

Economists have shown that the cost to get one drug to market successfully is now more than $2.8 billion. Most of this cost is due to FDA regulation…

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