Thursday, June 22, 2006

Rising Drug Prices

According to this article:

Prices of medicines used by older Americans for chronic conditions such as arthritis and high cholesterol are rising even as new federal drug coverage has been rolled out to help make prescriptions more affordable

Do you think it's a coincidence that the two events are occurring at the same time. I don't and neither does Stefan Karlsson:

This correlation in time is hardly coincidential, as this is just what you could expect from any increase in subsidies. Subsidies of anything will increase demand, something which in turn will of course raise prices.

I think I only partially agree with his analysis, though. Subsidies can also be used at times to increase supply (by subsidising the production of a good) thereby lowering prices. Of course, that's not what's happening here. In this case, the federal government is subsidising consumption thereby raising demand and prices along with it.