Patent system results in substantial deadweight losses due to monopoly pricing

The patent system as now implemented also causes substantial welfare losses because consumers who would buy the product if it were priced at somewhere nearer production cost do not buy it at the monopoly price.12 The welfare loss caused by this is called by economists the “deadweight loss” (DWL) of monopoly pricing, since there is a pure loss to society when consumers do not obtain a product which they value more than the cost of producing it. Guell and Fischbaum (1995), using highly aggregated data, claim that the scale of deadweight loss in the US drug market is on the order of $3bn- $30bn annually; in a more detailed paper (1997) the same authors estimate deadweight losses of $5bn on $8bn of sales, which indicates very large DWL for the market overall.13 Baker and Chatani (2002) construct a very rough estimate for DWL of $5bn - $20bn annually for the US. Globally, the DWL is certain to be many times this figure, because in many markets, drug insurance is unavailable and so consumers are more price-sensitive

Patent system provides little incentive to develop orphan drugs

Hollis, 2005 An Efficient Reward System for Pharmaceutical Innovation Aidan Hollis Department of Economics, University of Calgary; Institute of Health Economics1 email: ahollis@ucalgary.ca Draft – updated 17.01.2005 https://www.keionline.org/misc-docs/drugprizes.pdf

One of problems with the patent system is that it provides little incentive to develop so-called orphan drugs, or drugs for rare diseases. If the market is too small, firms cannot hope to recoup their costs for developing and testing drugs without extra incentives. As a result, in the United States special legislation was enacted to make developing such orphan drugs more profitable. In principle, there is no reason why exactly the same sorts of incentives could not apply to the proposal described here, including tax credits and special exclusivity rights. However, this proposal also allows for a relatively simple way of providing much more rational incentives. Special disease funds could be established which would provide additional rewards for drugs treating specific diseases.