M2 PressWIRE, a reputed online press release distributor, reported in a recent article that Fivium, “a rapidly growing dynamic IT company” (M2 PressWIRE 1) recently acquired a deal with the Australian government to reconfigure the existing drug subsidy (a sum paid by a government to a firm or private institution) plan in the nation, the Pharmaceutical Benefits Scheme (PBS). This is an important system, for consumers depend upon drugs for survival, and drugs would thus be considered a merit good (a good that should be distributed based upon need, rather than ability to pay). The present system’s “operation cost the Australian Government approximately AUD$7.7 billion” (M2 PressWIRE 1), in addition to creating other market failures including negative externalities (a cost incurred by a party that is not reflected in price). A negative externality that results from the present system of subsidies is the delay it takes for drugs to reach the market due to a dearth of supply caused by inefficiencies in the manually operated subsidy system. This implies a social cost in addition to the cost being paid privately by each consumer (see Figure 2). Subsidies must be equal in value of the negative externality in order to shift the equilibrium to the more efficient point of production. Given that drugs are merit goods, they have a relatively inelastic Price Elasticity of Demand (PED), or reaction in quantity demanded to a change in price. The reasoning behind this lies in a determinant of PED: the dearth of substitute goods (goods that can replace other goods to the same effect). Because essential drugs have no substitutes, PED is quite inelastic. In other words, people will typically find themselves willing to pay no matter what, left without a choice even if price increases drastically.
In the present, the Australian subsidy system is world-renowned for its effectiveness, but “the internal processes that support it are still primarily paper-based and the circulation, evaluation and assessment of submissions are also predominately manual” (M2 PressWIRE 1). As such, Fivium is seeking to provide an increase in technology in order to shift the Supply curve outward, as a change in technology is a determinant of supply. Ideally, this will lower costs, allowing more supply to those in need at a lower price, for the equilibrium point (market-created point that dictates quantity supplied at a certain price) resulting from the shift in supply will create a lower price level and a higher quantity supplied (see Figure 1). Another determinant of supply is the use of a tax (sum demanded by a government as a method of support) or subsidy to affect market workings. Pharmaceutical firms are inclined to produce as many drugs as are demanded, for the government subsidizes their production which leads to a greater profit for that firm, and a firm always seeks to maximize profit. This accounts for the shifting of the supply curve in Figure 1. Thus, in total, the increase in technology provided by Fivium’s new management will allow the subsidy system to become more organized, and as the system of subsidies experiences an increase in efficiency, an increase in supply will result as firms are inclined to produce more at a lower cost of production. Consumers will be happier with the government, as they will be receiving drugs in a timelier manner at a lower price, and the government will have succeeded.
The system of subsidies does create several new problems, however. In the short run, both the Australian Government and Fivium might see increased costs of operation as the revamping of the system must be paid for, and this may be reflected in drug prices. However, this is a one-time fixed cost; in the long run, prices will be reduced with increased efficiency and drug prices will be lowered for consumers. The money used for the subsidies must come from somewhere. In this case, this money indirectly comes from taxpayers. Those who don’t need drugs may be unhappy that they are forced to pay for this system through their taxes. Furthermore, the supply of more drugs creates a trade-off that reduces the number of other public goods. If government money pours into these subsidies, other public projects like infrastructure improvement might be delayed or ignored. In the long run, the subsidy system will provide time for companies to develop new technologies that allow for production of drugs at a lower cost without subsidies. Thus, as cost efficiencies of technology are realized, the need for subsidies decreases. (747)
3 main ideas: PED/S, S/D, Externalities
Works Cited M2 PressWire. “UK Firm Lands Multi-Million Dollar Deal To Automate Australian Drugs Scheme.” Access World News. NewsBank, 9 Sept. 2010. Web. 15 Sept. 2010. <http://infoweb.newsbank.com/iw-search/we/InfoWeb?p_product=AWNB&p_theme=aggregated5&p_action=doc&p_docid=13226F6E8E1076C0&p_docnum=1&p_queryname=1>.
COMMENTARY COVERSHEET Economics commentary number: HL Number 1 Title of extract: UK Firm Lands Multi-Million Dollar Deal To Automate Australian Drugs Scheme_ Source of extract: _M2 PressWIRE_ Date of extract:09/09/10 Word Count:_747_words Date the commentary was written:_29/09/10 Sections of the syllabus to which the commentary relates:_Sections 2.1, 6.1, 7.1 Candidate name: Michael Huntley Candidate number: ___
HL2 Internal Assessment--list of students
Post Commentary One--Microeconomics
M2 PressWIRE, a reputed online press release distributor, reported in a recent article that Fivium, “a rapidly growing dynamic IT company” (M2 PressWIRE 1) recently acquired a deal with the Australian government to reconfigure the existing drug subsidy (a sum paid by a government to a firm or private institution) plan in the nation, the Pharmaceutical Benefits Scheme (PBS). This is an important system, for consumers depend upon drugs for survival, and drugs would thus be considered a merit good (a good that should be distributed based upon need, rather than ability to pay). The present system’s “operation cost the Australian Government approximately AUD$7.7 billion” (M2 PressWIRE 1), in addition to creating other market failures including negative externalities (a cost incurred by a party that is not reflected in price). A negative externality that results from the present system of subsidies is the delay it takes for drugs to reach the market due to a dearth of supply caused by inefficiencies in the manually operated subsidy system. This implies a social cost in addition to the cost being paid privately by each consumer (see Figure 2). Subsidies must be equal in value of the negative externality in order to shift the equilibrium to the more efficient point of production. Given that drugs are merit goods, they have a relatively inelastic Price Elasticity of Demand (PED), or reaction in quantity demanded to a change in price. The reasoning behind this lies in a determinant of PED: the dearth of substitute goods (goods that can replace other goods to the same effect). Because essential drugs have no substitutes, PED is quite inelastic. In other words, people will typically find themselves willing to pay no matter what, left without a choice even if price increases drastically.
In the present, the Australian subsidy system is world-renowned for its effectiveness, but “the internal processes that support it are still primarily paper-based and the circulation, evaluation and assessment of submissions are also predominately manual” (M2 PressWIRE 1). As such, Fivium is seeking to provide an increase in technology in order to shift the Supply curve outward, as a change in technology is a determinant of supply. Ideally, this will lower costs, allowing more supply to those in need at a lower price, for the equilibrium point (market-created point that dictates quantity supplied at a certain price) resulting from the shift in supply will create a lower price level and a higher quantity supplied (see Figure 1). Another determinant of supply is the use of a tax (sum demanded by a government as a method of support) or subsidy to affect market workings. Pharmaceutical firms are inclined to produce as many drugs as are demanded, for the government subsidizes their production which leads to a greater profit for that firm, and a firm always seeks to maximize profit. This accounts for the shifting of the supply curve in Figure 1. Thus, in total, the increase in technology provided by Fivium’s new management will allow the subsidy system to become more organized, and as the system of subsidies experiences an increase in efficiency, an increase in supply will result as firms are inclined to produce more at a lower cost of production. Consumers will be happier with the government, as they will be receiving drugs in a timelier manner at a lower price, and the government will have succeeded.
The system of subsidies does create several new problems, however. In the short run, both the Australian Government and Fivium might see increased costs of operation as the revamping of the system must be paid for, and this may be reflected in drug prices. However, this is a one-time fixed cost; in the long run, prices will be reduced with increased efficiency and drug prices will be lowered for consumers. The money used for the subsidies must come from somewhere. In this case, this money indirectly comes from taxpayers. Those who don’t need drugs may be unhappy that they are forced to pay for this system through their taxes. Furthermore, the supply of more drugs creates a trade-off that reduces the number of other public goods. If government money pours into these subsidies, other public projects like infrastructure improvement might be delayed or ignored. In the long run, the subsidy system will provide time for companies to develop new technologies that allow for production of drugs at a lower cost without subsidies. Thus, as cost efficiencies of technology are realized, the need for subsidies decreases.
(747)
3 main ideas: PED/S, S/D, Externalities
Works Cited
M2 PressWire. “UK Firm Lands Multi-Million Dollar Deal To Automate Australian Drugs Scheme.” Access World News. NewsBank, 9 Sept. 2010. Web. 15 Sept. 2010. <http://infoweb.newsbank.com/iw-search/we/InfoWeb?p_product=AWNB&p_theme=aggregated5&p_action=doc&p_docid=13226F6E8E1076C0&p_docnum=1&p_queryname=1>.
COMMENTARY COVERSHEET
Economics commentary number: HL Number 1
Title of extract: UK Firm Lands Multi-Million Dollar Deal To Automate Australian Drugs Scheme_
Source of extract: _M2 PressWIRE_
Date of extract:09/09/10
Word Count:_747_words
Date the commentary was written:_29/09/10
Sections of the syllabus to which the commentary relates:_Sections 2.1, 6.1, 7.1
Candidate name: Michael Huntley
Candidate number: ___