FREC 424 (09S) Second Hour Exam (20 points)

Choose ONE of the following topics.  Limit your answer to a maximum of 500 words.  Cite whatever research resources you use (the 500-word limit does not count citations). Turn in your answer by noon on Thursday, May 21st at my office, Townsend Hall room 215; slip it under my door if I'm not there

1.  Pathogen resistance to antibiotics

The “Spanish flu” pandemic of 1918-1919 killed between 20 and 40 million people—more people than were killed in World War I, probably more people than died in any other epidemic in recorded world history.  The good news is that we now have antibiotic drugs that have been pretty effective against pathogens such as the Spanish flu.  The bad news is that the effectiveness of these antibiotics is diminishing over time.  Overuse and misuse of antibiotics causes antibiotic-resistant strains of pathogens to evolve much more rapidly.   The US now produces over 50 million pounds of antibiotics annually, and the majority of this is used in animal feeds to stimulate livestock growth rates and limit diseases caused by overcrowding of livestock.  The EU currently limits uses of antibiotics in agriculture much more strictly than the US. 

Drug companies don’t have much economic incentive to develop new antibiotics because…

· Antibiotics typically cure patients quickly, so they aren’t as profitable as drugs used for long-term treatment of chronic conditions.

· R&D for a new drug typically costs hundreds of millions of dollars, FDA approval is uncertain, and the approval process is painfully slow.  It often takes 10+ years to get a new drug to market. 

· Once a new antibiotic does get to market, its effective lifespan may not be long enough for the company to recoup its investment costs.  The FDA might prolong the new antibiotic’s effectiveness by limiting its use to humans only, and this policy would increase its public health benefits, but it would only reduce the company’s market opportunities. 

· Defending drug patents can be expensive, and enforcement of drug patents may be lax in some countries.  Once a drug’s patent expires, competitors often steal its market share by introducing generic equivalents. 

So there are no new antibiotics in the R&D pipeline, and many big pharmaceutical companies have terminated their antibiotics R&D altogether.  Meanwhile, World Health Organization (WHO) experts are convinced that another pandemic is coming, most likely a new super-pathogen from an avian source—it’s just a matter of time, and we won’t have the antibiotics to fight it effectively.

a) Explain this as a resource economics problem; what is the resource?  Why is the market failing to allocate it efficiently? 

b) Describe a possible regulatory strategy to correct this market failure.  How would it work?  How might it fail?

c) Describe an economic strategy that addresses the incentive problems.  How would it work?  Outline the roles the World Trade Organization, World Health Organization and US government might play. 

2. Ripped from the headlines: new CAFE standards

This morning the New York Times has a front-page article on tougher Corporate Average Fuel Economy standards for vehicles, including light trucks and SUV’s which were previously exempted.  The government is also giving owners of gas-guzzlers (my ’98 Ford Windstar!) incentives of up to $4,500 to trade them in for new, more fuel-efficient vehicles. 

a) Explain the likely effects of these policies on US energy and automobile markets. 

b) How would these effects differ from a significantly higher federal gasoline tax that created direct incentives to consumers to switch to more fuel-efficient vehicles?