Question

A patent that confers the monopoly right to produce an essential prescription drug tends to increase the incentive the develop new and better prescription drugs, while

A. imposing no cost upon society as a whole.
B.lowering the cost of prescription drugs to the public.
C. eliminating the monopolist's costs of defending its rights to the patent.
D.creating a "deadweight loss" of monopoly-induced inefficiency.

Answer 1

A patent-protected monopoly on a prescription drug can increase incentives for innovation but may also lead to monopoly-induced inefficiency, higher drug costs, and deadweight loss to society.

Step-by-step explanation:

The student's question concerns the effect of patent-protected monopolies on prescription drug markets, particularly focusing on the potential monopoly-induced inefficiency also known as deadweight loss. Patents do indeed provide an incentive to innovate by granting exclusive rights to produce and sell a new drug, thereby allowing the patent holder to earn monopoly profits for a limited period, which is typically 20 years for pharmaceuticals. However, the creation of a monopoly can lead to inefficiencies as the monopolist may lack the incentive to continue innovating or to maintain competitive prices, thus not only increasing the cost of prescription drugs to the public but also potentially leading to a deadweight loss to society. This is highlighted by the insight from John Hicks regarding the complacency that monopoly profits may engender.