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Funding pharmaceutical innovation through direct tax credits

Published online by Cambridge University Press:  24 August 2007

KRISTINA M. LYBECKER  and
ROBERT A. FREEMAN
KRISTINA M. LYBECKER*
Affiliation:
Department of Economics and Business, Colorado College, USA
ROBERT A. FREEMAN
Affiliation:
Department of Pharmaceutical Sciences, Texas A & M University Sciences Center, Rangel College of Pharmacy, USA
*
*Correspondence to: Kristina M. Lybecker, Department of Economics and Business, Colorado College, 14 E. Cache la Poudre Street, Colorado Springs, CO 80903, USA. Email: [email protected]
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Abstract:

Rising pharmaceutical prices, increasing demand for more effective innovative drugs and growing public outrage have heightened criticism of the pharmaceutical industry. The public debate has focused on drug prices and access. As a consequence, the patent system is being reexamined as an efficient mechanism for encouraging pharmaceutical innovation and drug development. We propose an alternative to the existing patent system, instead rewarding the innovating firm with direct tax credits in exchange for marginal cost pricing. This concept is based on the fundamental assumption that innovation that benefits society at large may be financed publicly. As an industry which produces a social good characterized by high fixed costs, high information and regulatory costs, and relatively low marginal costs of production, pharmaceuticals are well-suited to such a mechanism. Under this proposal, drug prices fall, consumer surplus increases, access is enhanced, and the incentives to innovate are preserved.

Type
Articles
Information
Health Economics, Policy and Law , Volume 2 , Issue 3 , July 2007 , pp. 267 - 284
Copyright
Cambridge University Press

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