INSULIN PRICE CAP ENDORSED BY PRESIDENT BIDEN IN STATE OF THE
UNION ADDRESS
Source: diaTribe Learn
Date: 15/05/22
Word count: 750
MICROECONOMICS
Key concept: Economic Well-being
$35 Insulin Price Cap Endorsed by President Biden in
State of the Union Address
US pharmaceutical companies and
insulin manufacturers react to proposed legislation that would cap
insulin costs and prevent significant rises in the costs of prescription
drugs.
In his State of the Union address on March 1, President Biden
advocated for a $35 price cap on the cost of insulin. If passed, this
legislation would limit the out-of-pocket cost of insulin to $35 per
month, helping make insulin more affordable and accessible to all
people with diabetes who need it.
The high cost of insulin, which can potentially be over $1,300 per
month for those without insurance, has had a drastic impact on the
health of people with diabetes. Research suggests that over 1 in 4
Americans with type 1 diabetes have had to ration their insulin
because they could not afford the cost of the drug each month.
Rationing insulin can be extremely dangerous, causing higher blood
glucose levels and increasing the risk of death due to diabetic
ketoacidosis (DKA).
Commentary:
The article I have chosen talks about a Price Cap endorsed by the President of The US, Joe
Biden on Insulin prices. The new price cap introduced is limited to 35 dollars and will benefit
diabetic patients all over the country.
This article explores the economic concept of Economic well-being. This government policy
aims at creating a better lifestyle for the citizens by implementing a price cap on Insulin to
increase their economic well-being.
A price cap is a government-imposed price limit on the price charged for goods and services.
A price cap can be introduced concerning the elasticity of a product. Elasticity is the measure
of the responsiveness of a good or service to a price change. A good is elastic if a change in
price leads to a large change in quantity demanded while an inelastic good leads to a small
change in quantity demanded.
In this case, insulin is a highly inelastic good, with one in four Americans forced to ration out
their insulin intake (according to a T1 International Patient Survey) and being a life-saving
drug, and companies exploit this fact and sell it at very high prices making it inaccessible for
people, therefore, the government has introduced a price cap.
We can graph this by taking quantity on the x-axis and price on the y-axis.
In a free market system, the equilibrium point where the demand and supply of insulin meets
is at P1 prices and Q3 quantities. However, introduction of a price cap or price ceiling at Pc
(35$) the quantity demanded shifts to Q2 quantities, since prices are lowered. There is,
however, an overall shortage of quantity, since the producers are forced to sell at Pc prices at
35$ due to this government mandate. Due to the Price cap, there is a clear welfare loss that is
labelled clearly on the graph. We can also see that there is relatively a larger consumer
surplus than producer surplus due to the implementation of the price ceiling.
The price ceiling at Pc-35$ denotes that the price cannot exceed 35$ in price while selling. P1
denotes the original price of the product.
Therefore, anything sold above the price cap is considered illegal, and firms will have enough
production capacity to produce at Q1 quantity due to the new decrease in product price.
The price ceiling will have the following effects on stakeholders in the short run (the short
run is defined as a time period where at least one factor of production cannot be altered):
Consumers: In the short run, the consumers will be better off, since they have more access to
affordable medication which improves their overall quality of life.
Producers: Producers face loss in revenue with introduction of the price cap and end up in
shortage of quantity, therefore, selling at a lower price for less quantity. Producers that are
not productively efficient at $35, could allocate their resources for the manufacture of other
medicines.
Government: In the short run, the government will be appreciated by the citizens of the
country, since 25 per cent of the American population would benefit from this since they
need insulin and their overall economic well-being increases.
The following effects take place in the long run (the long run is defined as a time period
where all factors of production are variable):
Consumers: There would be a shortage in insulin due to the good being highly inelastic and
due to demand for insulin being high because of the low prices and many firms would shut
down and resort to selling different goods other than insulin to maximise their revenue.
Producers: Efficient producers would continue to produce insulin creating efficient allocation
of resources in the market.
Government: Since insulin would not need to be rationed out anymore, it would create a
healthier population that contributes more to the growth of the economy since the price cap
would reduce other health issues associated with diabetes and would serve as a positive
externality of production.
In conclusion, insulin, being a life-saving drug is highly inelastic. People cannot live without
it and consumers would have to purchase it no matter what the prices are. Firms exploit this
fact and raise prices to create profit. Capping the prices would benefit consumers facing
health problems but would harm producers, especially in the short run. Coming back to the
economic concept of Economic Well-being – the price cap improves the Economic Well-
being of consumers who are unable able to afford the medication without the price cap.
