prescription medications

Prescription medications
Name
Institutional Affiliation
The price ceiling is a government intervention mechanism necessary for the provision of some essential commodities which experience inelastic demand meaning that prices are not a demand factor (Randall et al., 2016). In the first case, price ceilings are beneficial as they ensure that everyone gets the vital products like the medication for the life-threatening disease at a controlled price. Such services improve the public welfare and increase the life expectancy rates. The necessities sell within the upward limit placed by the government and the goods covered cannot be sold at a higher price than the ceiling. The primary objective of caps is to maintain the affordability of necessities by keeping their low rates. However, the price ceilings have many disadvantages in that most firms close owing to the reduced profit margins, firms lose interest in research and development, and massive tax burdens on the citizens to subsidize the drugs.
In case two, however, price ceilings on luxuries may have two outcomes: if the ceiling price is beyond the market equilibrium price, then it will have no effect as the forces of demand and supply have not been interfered with; however, if the government sets an upper limit below the market equilibrium, a shortage in the commodities will ensue. In a competitive market, the price set by the forces of demand and supply will rise sharply as the product becomes scarce. The medical prescription industry is a peculiar industry whose demand is relatively inelastic meaning that if the price of the medicines rises, the demand for prescription does not decrease with an equal proportion.

It infers that the market is inefficient because of the price ceilings thus leading to welfare loss like the inefficiency suffered. The pharmaceutical firm that makes the medication will be forced to leave the industry due to the reduced profits and the firms might even lower the quality of their products.
Reference
Randall, P. E., Bruno, P. and Zhu, W. (2016). Health care demand elasticities by type of service. Retrieved from http://blogs.bu.edu/ellisrp/files/2017/02/EllisMartinsZhu_Service_Elasticities_20161027_to-submit.pdf