TY  - JOUR
AU  - Philipson,Tomas
AU  - Mechoulan,Stephane
AU  - Jena,Anupam
TI  - Health Care, Technological Change, and Altruistic Consumption Externalities
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 11930
PY  - 2006
Y2  - January 2006
UR  - http://www.nber.org/papers/w11930
L1  - http://www.nber.org/papers/w11930.pdf
N1  - Author contact info:
Tomas Philipson
Irving B. Harris Graduate School
of Public Policy Studies
University of Chicago
1155 E. 60th Street
Chicago, IL 60637
Tel: 773/502-7773
E-Mail: t-philipson@uchicago.edu

Stephane Mechoulan
Dalhousie University
E-Mail: s.mechoulan@dal.ca

Anupam Jena
Department of Medicine
Massachusetts General Hospital
55 Fruit Street
Boston, MA 02114
E-Mail: jena.anupam@mgh.harvard.edu
AB  - Traditional economic analysis has proposed well known remedies to deal with consumption externalities and inefficient technological change in isolation, but lacks a general framework for addressing them jointly.  We argue that the joint determination of R&D and consumption externalities is central to health care industries around the world generally, and for the pharmaceutical industry in particular.  This is because technological change drives the expansion of the health care sector and altruism seems to motivate many public subsidies such as Medicaid in the US.  We stress that standard remedies to the two problems in isolation are inefficient — Pigouvian corrections to consumption externalities are inefficient under technological change and standard R&D stimuli are inefficient because they focus only on consumer and producer surplus, not the altruistic surplus accruing to non-consumers.  We provide illustrative calculations of the dynamic inefficiency in the level of US R&D spending due to the inability of innovators to appropriate the altruistic surplus.  We find that altruistic gains amount to about a quarter of consumer surplus in the baseline scenario.  Our analysis implies that total R&D could be under-provided by as much as 60 percent.
ER  -