Question: Many observers consider it a market failure when the pharmaceutical industry refuses to do research and development on what are known as neglected diseases: cures for malaria and tuberculosis and vaccines for other diseases in developing countries where the profit potential is small. Further, many drug firms are unwilling to make vaccines for illnesses such as influenza and other biohazards such as anthrax and small pox. Vaccines are especially prone to large lawsuits because when they are administered, they are administered to millions of people in an emergency, and if there are serious unanticipated side effects, settlement costs can be huge. With anthrax vaccine, ethical considerations prevent exposing someone to anthrax and then injecting the medicine, so these types of vaccines often are used in emergencies without sufficient testing.

a. One of the solutions currently used for neglected diseases is the public- private partnership (PPP). Grants by the Bill & Melinda Gates Foundation currently fund most of the PPPs that are conducted on a "no profit, no loss" basis. The firm's research and development costs are covered, but firms must sell the drugs at cost to developing countries. Why would pharmaceutical firms be willing to spend time on these types of projects?

b. Since lawsuits are an important impediment to research and development of vaccines, what policies could the government institute to solve this problem?

c. Besides the use of the PPP, what other policies might the government introduce to encourage drug firms to do research and development on neglected diseases and orphan diseases (diseases that affect only a few people and thus have extremely limited markets)?