Alternative ways to spur the medical researches

Some traditional ways:
(1)Patents protection-- man-made monopoly
(2)Government intervention and subsidy
(3)Prizes

The first and second way are the most common, but they also cause unintended consequences.

Patents:
The monopoly pricing of patented goods prevents some people who need those goods from buying them. If intellectual property rights are not respected, private firms will lose their incentive to develop new drugs.


Patents nevertheless create insufficient incentives for original research because, even with patents, inventors do not capture the full benefit of their inventions.
(1) The demand is inelastic, so how much the producer produces will affect the marginal price. But the price may be too high for most people to afford.
(2) Some of the benefits accrue to consumers who value drugs more than the price.
(3) Some of the benefits accrue to consumers who then go to buy generic substitutes after the patent expire.


The patent system creates an incentive for other firms to design around the first patent so as to produce a competing vaccine and obtain a share of the market.
Sixty percent of patented innovations are imitated within four years; the average cost of an imitation is typically two-thirds the original cost of an invention.

In addition, patent blocks the potential room of improvement for the patented products.

Government funding:


The government often has difficulty in selecting appropriate research projects and in motivating researchers to focus on developing viable projects.Researchers applying for grants have an incentive to present the prospects of success in the best possible light to increase their chances of receiving funding. Research administrators in turn have incentives to tell their superiors that prospects for success are bright in order to increase the budgets of their divisions.


It can be difficult to determine whether a researcher is focusing on development of a product, trying to publish an academic paper, or preparing the next grant application. Another problem with direct government financing of r&dis that organized interests (e.g., defense contractors and aids activists) may lobby to influence these decisions, diverting research expenditures from objectives that are scientifically meritorious or economically viable.

Third way: Prizes
Prizes are granted only if the project get success and thus it provide stronger incentive to researchers. (By contrast, government funding may suck because researchers get funding first, and they may try to get more grant rather than finish the task in the most efficient way.)

Private research focuses on lucrative stuff. Those that are most important may not be in consideration of researchers because they are not profitable.


Drawbacks of government financing:
First, recipients of government funding have incentives to be overly optimistic.

Second, government project directors have incentives (aside from embezzlement opportunities) to fund unpromising research.

Third, because the recipients of government subsidies are paid before delivering a product, they may be tempted to divert resources away from the search for a vaccine






Unlike direct government financing of research, a purchase commitment allows the private sector to decide which projects to pursue; that is, research priorities are not centrally planned by government, but independently decided by private firms reacting to the market incentive offered by the purchase commitment.