Economics IA

Link to article - https://economictimes.indiatimes.com/nppa-fixes-ceiling-price-of-92-drug-

formulations/articleshow/65424679.cms
This article is about a Drug price regulator NPPA fixing a price ceiling on 92 Drug formulation
including those which are used for treatments of cancer, hepatitis C, migraine in an attempt to
make those treatments affordable for consumers.
The economic concept ‘Price ceiling’ states that the government set’s a legal maximum price for
a particular commodity to control the maximum prices that can be charged by the suppliers.
This is conducted to limit the seller pricing system, ensure fair business practices and make
commodities affordable to general public. To further explain the effect of the policy on the
market of drug formulations the diagram below will be used.

The market was being operated on (Pe, Qe) but as the price Pe was considered high, a price ceiling was
implied by NPPA. Although, this established a persisting market disequilibrium they were able to lower
the price of the good from Pe to Pc. Furthermore, as firms receive less revenue (Pe*Qe) to (Pc*Qs), they
will be less capable to conduct research and development to improve the drugs which are the
treatments of many important diseases and vital to human health. Moreover, as, less output is being
generated (Qs<Qe) some workers are likely to be fired resulting in additional unemployment.
Government will have no gains or losses in its budget, but they may gain political popularity among
consumers who have benefited through the price ceiling. Lastly, a welfare loss can be seen in the graph
(b+d), welfare loss represents benefits that are lost to society because of resource misallocation. This
can be determined as with no price control the market operated at price Pe and quantity Qe at
equilibrium. Consumer surplus was equal to areas ‘a+b’ and producer surplus was equal to areas
‘c+d+e’. Consumer plus producer surplus is maximum and equal to areas ‘a+b+c+d+e’. After the price
ceiling the quantity Qs is being produced at price ‘Pc’. Consumer surplus became s ‘a+c’ and producer
surplus became area e. Total social surplus is a+c+e. Comparing social surplus, we can observe areas b
and d have been lost and are now represented as welfare loss.

The important drug treatments have now been more affordable for consumers, but as

The price control implemented by NPPA has reduced the prices of important drugs but they are
essential medications for a human body to survive and are not produced enough in the market as
Qd>Qs. Since the price mechanism would not be able to able to distribute the, it will give rise to non-
price rationing methods like first-come-first serve basis, favoritism done by sellers to loyal customers
etc. This may also lead to the construction of parallel market as there will be consumers who will be
willing to pay a higher illegal price for the product. This will increase the gap between wealthy and
impecunious as the wealthy will be able to pay extra to receive those medications. Although, the
NPPA has successfully lowered prices of the drugs, it has also jeopardize the life of citizens as many
citizens would die if not provided with those diseases, decreased the scope for further improvement
in drugs,

many people are now able to afford those medications, many consumers will not receive the
medications and face severe consequences as these medications of cancer, migraine and other
diseases are heavily required by the human body to survive

Although, many people are now able to afford those medications, many consumers will not receive the
medications and face severe consequences as these medications of cancer, migraine and other diseases
are heavily required by the human body to survive. Since,

Consequently, now these essential medications are not produced enough in the market as Qd>Qs and
are required by the human body to survive. Although, many people are now able to afford those
medications, many consumers will not receive the medications and face severe consequences as these
medications of cancer, migraine and other diseases are heavily required by the human body to survive

The important drug treatments have now been more affordable for consumers. However, as they are
essential medications which required by the human body to survive, they are not produced enough in
the market as Qd>Qs. This will give rise to non-price rationing methods, these are methods which apply
when a shortage arises through price ceiling. Once the price mechanism is no longer able to function,
the distribution of goods are conducted through non-price rationing methods. These methods include
first-come-first serve basis, distribution of coupons to all interested buyers and favoritism done by
sellers to loyal customers. This may also lead to the construction of parallel market or underground
markets, as there will be consumers who will be willing to pay a higher illegal price for the product. This
will furthermore increase the gap between rich and poor as the rich are able to pay extra to receive
those medications. Although, many people are now able to afford those medications, many consumers
will not receive the medications and face severe consequences as these medications of cancer, migraine
and other diseases are heavily required by the human body to survive