Anemia drug overused, says FDA

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Anemia drug overused, says FDA
http://www.montereyherald.com/mld/montereyherald/living/health/16875610.htm

Erythropoietins, anemia fighting drugs, generated $10 billion in sales in American alone last year to fight anemia, a common blood disorder in which the patient’s red blood cell levels are short of normal. According to the article, FDA (Food and Drug Association) reports claim that erythropoietins are being used so aggressively that patients are being harmed. Damages include blood clots in the legs and lung, some fatal, as well as an increased risk in dying for cancer patients.
This situation illustrates two market failures, where the resources are not being allocated at an optimal point. The resource erythropoietin is a clear example of a demerit good, where the government considers the product to be harmful and it is being over consumed. This illustrates one key market failure, problems of information. Theoretically, consumers and producers have perfect knowledge of the market, but in this case, the consumers are not aware of the side effects of erythropoietin. Consumers are purchasing based on inadequate information, causing the market failure. Currently, erythropoietins are being given to some patients at doses higher than FDA approved. The consumption of these good results in a negative externality resulting in another market failure, negative externality of consumption. This occurs when the consumption of a good or service results in the harm of a third party, in this case society as a whole. As people with low red blood cell levels take erythropoietin, there is an increase in the risk of death. Consequently, they will consume hospital space, increasing demand for hospital. Thus, insurance costs and costs for going to the hospital will increase for other people. This is an external cost which is not accounted for when producing erythropoietin. Consumers who consume the good will not take into account the external cost created to other members of society.



Erythropoietin is currently being produced at point a (Q1, P1) where MSC intersects MPB (Marginal Private Benefit). As seen by Figure 1, this does not include the external cost, which results in a negative externality. Point b (Q2, P2) is where the market should be producing to eliminate the market failure; this is where MSC intersects MSB, taking into account all external costs, thus eliminating the welfare loss.

Figure 1. Graph depicting the negative externality resulting from production of Erythropoietin

There are a host of options that would effectively correct this market failure. The most obvious solution would be to ban the use of erythropoietin. This would effectively eliminate all legal uses of this drug; however, this is not the optimal point as production needs to be reduced and not eliminated. This would also destroy shareholders of companies such as Johnson & Johnson who depend on the sales of such drugs. A more realistic approach would be to place an indirect tax on erythropoietin. The tax removes any welfare loss and also gives the government tax revenue. The tax revenue can be placed into research for a better cure for anemia that does not contain the negative externalities that erythropoietin does. The issue with taxes on drugs is that it will only work on a worldwide scale. If prices increase only in the United States, patients tend to purchase the drug in Canada, where prices are significantly lower.



2. MARKET FOR ERYTHROPOIETINS WITH INDIRECT TAX (VAT)

When the government imposes an indirect tax on erythropoietin, the MSC curve shifts outwards to the curve of MSC+TAX. Production shifts from point a (Q1, P1) to point c (Q2, P3), where the light grey shaded area of welfare loss no longer exists. The dark grey area represents tax revenue [(P2-P3) x Q2] received by the government, where consumers pay the tax portion from P1- P3 and the producers pay the portion from P2 - P1.

Figure 2. Graph showing the result of placing indirect tax on a product with a negative externality


Another solution that has already been put in place by the FDA is negative advertising. The FDA has placed black label warnings on all new bottles of erythropoietin being produced. Other forms of negative advertising can include education on the negative aspects of taking the drug. This also effectively minimizes and possibly eliminates the market failure of problems of information.



3. MARKET FOR ERYTHROPOIETINS WITH NEAGATIVE ADVERTISING
As consumers learn about the negative externalities, the MPB curve will shift left to point b, where MSB intersects MSC. Quantity supplied will decrease as well as price and the market will produce at the optimal point, thus the welfare loss will be eliminated.