Nova workboard

a blog from young economists at Nova SBE

Sick Profit

                We like adrenaline. We like the surge of it that we get when we jump from a plane (preferably with a parachute on our backs) or when drive at high speeds with bugs splashing in the windshield. Of course we often get this enjoyable adrenaline from “daredevilish” feats that are actually pretty safe. The bungee rope doesn’t have a big history of letting people splash in the water like bugs in a windshield and a sensible driver will know when the risks escalate too much – most of us, mere mortals, will be quite hesitant if we’re ever asked to jump over school buses with a most fragile motorcycle (unless you’re Evel Knievel).

                As we are cautious with the sources of our adrenaline rushes, so are we careful to take cover from bad situations or episodes that would be too blunt for us to bear. Take a driver for example – no matter how safe he is, there’s always a chance that, one day, something goes terribly wrong and he’s involved in a car crash that damages his car quite severely. The average driver will want to insure against that chance, he won’t be willing to gamble the chance of being deprived of a vehicle for too long. For that to happen, he’s willing to pay a fixed amount during the good, crash-free periods, so that he receives compensation when bad luck strikes. He pays during the good periods to be better off in the worse moments.

                One common type of insurance concerns health issues. There are several contracts available that serve for different purposes, for different people. The same general principle applies here – we pay when we’re healthy in order to reduce the expenses when we fall ill. When we fall ill, the insurance is, dependable on the kind of contract, liable for covering our treatment costs assuring our path back to a healthy state. This means that insurers are interested in our health; they have more to gain when we’re healthy and paying than when we’re sick and receiving compensation.

                In contrast, pharmaceutical companies exist to provide the drugs needed for both recovery or to mitigate the effects of long lasting conditions such as diabetes or asthma. This leads to the uncomfortable truth that these companies do better when we’re sick or when we  suffer from such long lasting conditions and they do worse when we’re plain healthy and joyful.

                There is, therefore, a deviation between what’s socially desirable (health) and what grants profit to pharmaceutical companies (lack of healthiness) which can be quite dangerous, especially when considering conditions of a more permanent nature. As those afflicted with these conditions are burdened with the persistent purchase of some drug or supplement, so it is that there’s absolutely no incentive whatsoever for the pharmaceutical companies to actively seek any development in the control of those conditions since it’s much more profitable to be constantly selling a drug than selling, let’s say, a one-time-use product.

                To wrap up, here’s again one more example of a “market failure” since the companies’ attention to profit will lead to an outcome that’s not socially optimal. Perceiving each firm as an independent agent that lunges at the market in an individualistic manner is a most blatant mistake. Only by indulging in conceiving the “market” as a web of dependant relations between agents, that must make decisions with a conscious mindset, will we ever be able to efficiently work out these “market failures”. Otherwise we’ll keep missing the forest for the trees.

Filipe Figueiroa

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Author: studentnovasbe

Master student in Nova Sbe

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