1A. Market failure is a situation in which the allocation of goods and services is not efficient. In any given market, the quantity of a product demanded by consumers does not equate to the quantity supplied by suppliers. This is a direct result of a lack of certain economically ideal factors, which prevents equilibrium.
Some major reasons that a free, unregulated market in medical care might night be optimal are: Imperfect information, asymmetric information, barriers to entry, and third-party payers. * Imperfect information is a major reason because in medical markets, patients are not fully informed about virtually every aspect of the medical transaction. These patients are forced
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Barriers allow firms to obtain higher profits than would be realized in a purely competitive market place, but simultaneously provide incentives for introduction of new pharmaceuticals into the marketplace. Three key factors create barriers: Patents, first mover market advantage, and economies of scale and high fixed costs. * Regulatory Environment and the Impact on Supply and Demand. Federal and state governments influence the selling and buying of pharmaceuticals through supply-side and demand-side economics, respectively. Regulation can either move the equilibrium price closer to or further away from the perfectly competitive price. Clearly, patent regulations provide monopoly power to branded drug manufacturers in the short term and, therefore, raise prices in the short term. * Third party insurance. Insurance provides cost sharing and thereby reduces the price that the patient perceives when purchasing prescription drugs. The out-of-pocket cost to the patient depends on the level of coinsurance and deductible. As a result, the same patient may have to pay the entire cost of a specific drug “out-of-pocket” under one insurance plan, while the same drug may be covered on the formulary of another insurance company. However, a pharmaceutical company may offer lower prices to negotiate favorable formulary positions. * Asymmetric Information. The market for goods works under the