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Government Intervention in Markets: Prescribed Drugs in North America - Activity

The 'free market' is meant to be exactly that - free! Unfortunately, the working of the free market does not always suit everybody or make sure that everybody has access to the goods and services they need. As a result, governments and other international bodies often seek to 'correct' a market failure of this sort by manipulating the market to achieve a desired end. The following case study outlines one such example. The Activity then encourages you to explore the consequences of the intervention and to use supply and demand analysis to illustrate the points being made.

The Canadian Government have, for many years, imposed price controls on prescription medicines for its citizens. The intention is to ensure that Canadian citizens can afford to purchase the necessary drugs that they need.

Image: Price controls may be one method of making prescription medicines available to all - but at what cost?

Residents in the United States do not have price controls imposed on drugs that they need. The result is that those who live in neighbouring states close to the Canadian border have found that they can buy their drugs some 30-50% cheaper than in the US. The journey across the border has been supplemented by those buying drugs over the Internet and to cases where whole counties are contemplating purchasing drugs from Canada for use in their state, saving thousands of dollars of the local county budget.

The fact that more drugs are being bought by US residents is causing concern in Canada. The supply of such drugs by the leading phamaceutical companies such as Pfizer, Bayer and Glaxo SmithKlein is under scrutiny. They have stated that supplying drugs to the Canadian market that then get re-sold at discount prices in the US is not something they support. This also applies to the availability of cutting edge medicines designed to treat illnesses like HIV. The Canadian Pharmacists' Association (CPA) have reported members complaining that they are finding it difficult to get supplies of certain drugs to sell to Canadians and blame the export of drugs to the US for the problem.

There is conflicting evidence as to the extent of these shortages. Some sources say there is no evidence of actual shortages but many of the internet pharmacies are complaining of having difficulties in obtaining supplies but that, in the end, they are able to do so. Some suggest that the actions of the major companies in seeking to protect their profits is the major reason behind any shortages!