Tornadoes and the markets for medicines

The New Zealand Herald reported last week:

The fallout from a Pfizer factory being damaged by a tornado could put even more pressure on already-strained drug supplies at US hospitals, experts say.

The tornado touched down near Rocky Mount, North Carolina, and ripped up the roof of a Pfizer factory that makes nearly 25 per cent of Pfizer’s sterile injectable medicines used in US hospitals, according to the drugmaker...

HOW WILL THIS AFFECT HOSPITAL DRUG SUPPLIES?

It will likely lead to some long-term shortages while Pfizer shifts production to other locations or rebuilds, said Erin Fox, senior pharmacy director at the University of Utah Health...

Hospitals also may switch to different forms of a drug by giving a patient an antibiotic pill instead of an IV if that person can handle it. If a larger vial size of a drug is more readily available, they may order that and then fill several syringes with smaller doses ready for use.

Since my ECONS102 class covered the model of supply and demand last week, this seems like a timely example to look at. First, let's consider the market for injectable medicines, as shown in the diagram below. Injectable medicine production has reduced due to the unavailability of the large Pfizer factory, so there has been a decrease in supply, shown by the supply curve shifting up and to the left, from S0 to S1. If injectable medicine prices were to remain at the original equilibrium price (P0), then the quantity of medicines demanded (Q0) would exceed the quantity of medicines supplied (QS) at that price, because injectable medicine producers are only willing to produce QS medicines at the price of P0, after the supply curve shifts. There would be a shortage of injectable medicines, as the article notes as a likely consequence.

However, the problem of the shortage could be solved, if the market was able to adjust. How would that work? Consider what happens when there is a shortage. Some buyers (hospitals, for example), who are willing to pay the market price (P0), are missing out on medicines. Some of them will find a willing seller, and offer the seller a little bit more, in order to avoid missing out. In other words, buyers bid up the price. The result is that the price increases, until the price is restored to equilibrium, at the new (higher) equilibrium price of P1. At the new equilibrium price of P1, the quantity of injectable medicines demanded is exactly equal to the quantity of injectable medicines supplied (both are equal to Q1). We can say that the market clears. There is no longer a shortage.

However, that's not the only solution. Perhaps there are substitute goods that buyers can switch to. The shortage of injectable medicines, or an increase in injectable medicines, both cause incentives for buyers to switch. The article mentions switching to antibiotic pills instead of IV antibiotics. The effect that will have on the antibiotic pill market is shown in the diagram below. The demand for antibiotic pills increases from DA to DB, the price increases from PA to PB, and the quantity traded increases from QA to QB.

It seems like there is no good solution here. Either injectable medicines increase in price, or they become less available (or both!), and/or substitute medicines become more expensive as well. In a public healthcare system (like New Zealand), it will be the government (taxpayers) that will foot the bill. In private healthcare systems (like the US), it will be patients (or insurers, which ultimately means patients through higher insurance premiums). that pay more. The only winners are likely to be the producers of substitute medicines, who might see an increase in profits from the increasing demand for their products.