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Transcript
Competition, Monopoly, and Market Failure in
the Market for Drugs
P*
c
Demand
Marginal Revenue
a
b
MC=$1
Quantity
This figure shows the equilibrium price for a medication over which the manufacturer has monopoly power. The profitmaximizing price P* is the price where marginal revenue equals marginal cost.
Pareto efficiency requires that the price be equal to the marginal cost. Since price is much higher, there is an economic
inefficiency: consumers between points a and b would be willing to pay more than $1 for the drug, but because the
maximum they are willing to pay is < P* they will not obtain the medication.