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Posted: August 9th, 2022
Market Efficiency and Market Failures
Investigate an industry market failure that has occurred within the last 10-years in the U.S. Identify the events that led to the market failure.
Consider the steps that should have been taken to self-correct the market failure and steps that are being taken to eliminate the need for another government bailout in the future. Is your chosen industry currently operating efficiently?
Locate a recent article or event (published within the last year) that highlights your relevant microeconomics topic.
Market Efficiency and Market Failures
A market failure occurs whenever there is inadequate supply of goods or services in the market. It can also take place when there is an excessive supply of goods and services; reducing demand levels hence a lack of equilibrium in the free market. An example of market failure is the manipulation of drugs prices by big pharmaceutical companies. In 2015, Shkreli the CEO of Turing Pharmaceuticals inflated the cost of Daraprim, a critical drug by up to 5000%. The price rose from $13.50 to $750 overnight. Despite the sharp criticism from Congress, the government did not intervene. When Shkreli and the company realized the laxity in the drug market, they took advantage of the situation and escalated the prices (Luthra, 2018). While the Food and Drugs Administration (FDA) is tasked with testing and approving various drugs, market prices are set by the manufacturers. This gap led to the escalation of Daraprim prices.
There are various ways to correct market failures. The most popular measure is through government intervention. The government can choose to alter an existing incentive structure according to the complexity of the existing problem. At the time of the pharmaceutical crisis, the government should have encouraged honesty in the business by checking the appraisal terms that led to the creation of artificial shortage of the drugs. Secondly, regulation of prices should be a major consideration. By FDA leaves pharmaceutical companies to control the prices of the drugs, a huge gap is created. The government should intervene to eliminate price manipulation.
An article What’s the Latest on Medicare Drug Price Negotiations? highlights the latest developments in the negotiations between Medicare and big pharmaceuticals in negotiating the prices of prescription drugs. This move is seen as a practical way of avoiding market failure.
References
Cubanski J., Neuman T. , and Freed M. (2021, July 3). What’s the Latest on Medicare Drug Price Negotiations? Retrieved from https://www.kff.org/medicare/issue-brief/whats-the-latest-on-medicare-drug-price-negotiations/
Luthra, S. (2018, May 4). ‘Pharma Bro’ Shkreli is in prison, but Daraprim’s price is still high. Retrieved from https://khn.org/news/for-shame-pharma-bro-shkreli-is-in-prison-but-daraprims-price-is-still-high/
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