Roche announced today that it is stopping US wholesale shipments of Tamiflu to prevent "hoarding". Hoarding is exactly what they are doing. The move will shock wholesalers while people buying in advance of avian flu like me are shocking some retailers. Distributers are the last link in the chain. As they process this news, all retailers will begin to restrict access to Tamiflu. Rationing at a below market price results in the drug not going to people who value it most.

Higher prices put Tamiflu out of range of the bulk of the market. The only way they benefit from the higher prices is indirectly through the higher tax revenues from higher profits in the supply chain or increasingly as shareholders. Rationing benefits people who get the ration cards or whatever. There is an ubounded loss in efficiency when some people who want the drug are turned away because they have money, but do not qualify for a ration. An optimal policy might be a tax on emergency use that is distributed to everyone in the country equally. Don't expect politicians to adopt that one.

Doctors, pharmacists and drug companies clearly know best exactly how much to provide becaue they are so good at economics. And they are prescribing, dispensing and producing Tamiflu for the good of the country. Perhaps I know better how many doctors, pharmacists and drug companies the country should have. I think there should be a medallion system like taxis.

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And here I thought the optimal policy would be to let price signals do their work and signal Roche that it should make more Tamiflu to cash in.

Touche. That is not very equalist. That is capitalist, but there is a democracy component missing. High prices and profits may need to be taxed and some users subsidized to make sure they don't take to the streets among other things. There ought to be a way to prove that a tax/subsidy scheme is Pareto superior (that is even the worst among us who could afford Tamiflu only at the old prices would be better off too). Unfettered capitalism maximizes aggregate welfare, but without a good distribution tool, that may benefit less than half of the people (in this case Roche shareholders, people who wanted Tamiflu but couldn't get it at below market prices, whoever benefits from higher taxes) and hurt almost as many as it helps. I.e., someone who would be lucky enough to get the drug under the old distribution scheme.

We could assure Pareto optimality a much simpler way, which is to suspend the resale prohibition for Tamiflu. People could qualify the normal way, then they could resell. The transactions costs would be high and we might attract some speculators who have no personal demand for the product, but almost all the provable benefit would then go to people who would otherwise get the drug.