This isn't an example of an invisible hand is it?
A single drug company obtains a patent on a lifesaving drug. The company can charge whatever it chooses for the drug and will not lose customers. Is the invisible hand at work in this scenario?
I say no because the customers what a better value of the drug than charging too much for the drug.
I agree with your answer.
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Erin Go Bragh!! :-)
I disagree. The "invisible hand" has nothing to do with moral precepts.
The firm is a profit maximizer. It provides a product and changes the maximum amount it thinks it can. People willing to pay the price do so. So the product goes to those people willing and able to pay the highest price. Perhaps immoral, but exactly what the "invisible hand" concept predicts. (Goods go to those folks willing to pay the most).
Now then, one could argue, the firm is acting as a monopolist and this is a form of market failure where there are some people willing to pay more for a product than it costs to produce. A fair point, I would counter with the invisible hand is working, but not perfectly.
To determine whether the concept of the invisible hand applies to this scenario, let's first understand what the invisible hand refers to. The invisible hand is a concept coined by economist Adam Smith, suggesting that the pursuit of self-interest in a free market can lead to unintended positive outcomes for society as a whole. It argues that individuals seeking their own benefit will naturally contribute to the overall welfare of society.
In the given scenario, a single drug company holds a patent on a lifesaving drug, which means it has exclusive rights to produce and sell the drug for a certain period of time. With no competition, the company has the ability to set the price as it sees fit.
However, the invisible hand is not at work in this scenario because there are no market forces driving the price down or promoting competition. Without any alternatives or substitutes, customers have no choice but to purchase the drug at the price set by the company. This imbalance of power puts the company in a position to charge exorbitant prices, perhaps even beyond what customers perceive as a reasonable value for the drug.
The key difference here is that the invisible hand relies on market forces, such as competition and consumer demand, to naturally regulate prices and ensure allocation of resources in the most efficient way. In a situation where a single company possesses a monopoly, like in this case, market forces are weakened or nonexistent.
In conclusion, without competition or alternatives, the invisible hand does not shape the pricing of the lifesaving drug in this scenario. The company has the ability to charge whatever it wishes, even if it exceeds the perceived value by customers.