PharmaceuticalsInnovation in the pharmaceutical market is a debated and highly charged topic. For instance, it charges high prices due to research and development costs and risk factors. However, it can provide positive external benefits. If a new drug saves a life, it produces a private benefit to the company as well as the saved individual. At the same time, other parties also benefit. For example, family and friends no longer have to fear losing a close friend or loved one, and the grief it would bring.Who is the third party?What is the externalities?Good or bad?When dose the spillover occurs?
Question
PharmaceuticalsInnovation in the pharmaceutical market is a debated and highly charged topic. For instance, it charges high prices due to research and development costs and risk factors. However, it can provide positive external benefits. If a new drug saves a life, it produces a private benefit to the company as well as the saved individual. At the same time, other parties also benefit. For example, family and friends no longer have to fear losing a close friend or loved one, and the grief it would bring.Who is the third party?What is the externalities?Good or bad?When dose the spillover occurs?
Solution
The third party in this context refers to the family and friends of the individual whose life is saved by the new drug.
Externalities refer to the indirect effects of an economic activity that affect other parties without this being reflected in market prices. In this case, the positive externalities are the benefits experienced by the third party (family and friends) due to the saved life of the individual.
The externalities are good in this context as they result in positive outcomes - the saved life of the individual and the relief experienced by their family and friends.
The spillover occurs when the new drug saves a life. This is when the benefits extend beyond the direct parties involved (the pharmaceutical company and the individual) to the third party (family and friends).
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