2021-11-19T12:47:41+00:00

Allocative Efficiency

This paper concentrates on the primary theme of Allocative Efficiency in which you have to explain and evaluate its intricate aspects in detail. In addition to this, this paper has been reviewed and purchased by most of the students hence; it has been rated 4.8 points on the scale of 5 points. Besides, the price of this paper starts from £ 79. For more details and full access to the paper, please refer to the site.

Allocative Efficiency

Firms that discover a new drug (or purchase rights to someone else`s discovery) typically apply for and receive a patent on that drug from the government in each country in which the drug might be sold, before going through the expensive and time-consuming development and testing process to bring it to market. These R&D costs can be very large, sometimes in the tens or even hundreds of millions. (Drug companies overstate them, but they are large.) The patent makes it illegal for any other firm to sell that drug without the patent-holder`s permission-granting a monopoly on the sales of patented drug. Would-be competitors must either purchase the right to sell the same drug- if the patent-holder is willing to sell- or go through the process of discovering the and developing a slightly different d rug with a more or less similar effect.

a. The conditions of "allocative efficicency" require that the price at which a commodity sells on the market be equal to its marginal cost of production. This equaility is supposed to be ensured for commodities produced by profit-maximizing firms under conditions of perfect competition and free entry. Yet patents represent a deliberate policy to block entry and create a monopoly. Under these conditions, what considerations will determine the price of a patented drug and what relation, if any, will the price bear to the marginal cost of manufacturing and distributing that drug? Show graphically the allocative distortion, the "welfare burden" in terms of Question 1, created by the patent.

b. So why do governments issue patents at all? Explain, showing the contrast between the average and marginal cost curves for a firm with very high fixed costs and low marginal costs, and those assumed for the "standard" textbook firm. What might one predict would happen to the rate of innovation if there were no patent protection? Why? Can you interpret your prediction in terms of trade-ff between short-run and long-run allocative distortions, or "short-run pain for long-run gain"? Be as specific as you can about exactly what society as a whole is giving up, and getting, within the terms of this trade-off.

Please see attached for full question.


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