Question: A recent article in the New York Times reported that drug companies in India have recently managed to learn the formulas for producing a large number of drugs invented by American drug companies (including Viagra!). With the formula in hand, it is very cheap to make these drugs. The Indian drug companies have therefore begun producing these drugs and selling them at prices as low as one tenth the price charged by the US drug companies.
a) Discuss the effects of the actions of the Indian drug companies on Pareto e?ciency. (To be concrete, analyze the case of a specific drug V , which is sold in the US at a price of PU and in India at a price PI < PU ; assume that the cost of production is the same in the US and India, C; assume that all industries in the US and India are perfectly competitive except for the US drug industry; and assume that the prices of goods other than the drug are the same in the US and India, PO. You will not get full credit unless you correctly use the concepts of the marginal rates of transformation and substitution in your answer.)
b)The US drug companies say that they spent billions of dollars to develop their drugs, and that the Indian companies are stealing their intellectual property. If you were hired by the US drug companies to make an argument for why it is good for social welfare to allow them to charge high prices for their drugs, what argument would you make?
c) Suppose that the US drug companies are successful in their efforts to use international law to get the Indian government to shut down the copycat Indian drug companies. Suppose further that it is true that Indians are much poorer than Americans so that no Indians will buy the drug V unless the price is fairly close to the value PI that was being charged by the Indian drug companies. Discuss the prices that the US drug company is likely to charge in India and in the US for the drug. Also discuss the likely effects on social welfare of a bill Congress debated earlier this year that would have made it very di?cult for US drug companies to sell their products in other countries at lower prices than in the US.
d) The heavy-metal rock band Metallica has complained loudly about tracks of its songs that are being downloaded and passed around on the Internet for free. Newspapers have interviewed some of the people who have passed around Metallica tracks, who have said that nothing they were doing had hurt Metallica because they wouldn't have bought Metallica's albums anyway. What does this have to do with the case of the Indian drug companies?