Proposition 78

Prop 78 is being packaged as a drug discount measure, but it is really a price discrimination measure.

Drugs are intellectual property with high fixed costs and low marginal supply costs and profits can be increased by price discrimination. Student discounts increase profits because vendors can charge one profit maximizing price to students and a different profit maximizing price to non-students. This leads to higher profits than if vendors charged only one profit maximizing price to all. Rebates are another price discrimination program, charging one price to people with the patience to claim them and another price to those who don't. The drug market is already split into two segments, low-income families on Medi-Cal who have drugs purchased by the state at taxpayer expense, and the rest who pay market prices. Prop 78 creates another segment of lower-income families with income below 300% of poverty level. All the language about voluntary discounts and rebates really means that lower income people will pay one market price and everyone else will pay a different market price for drugs.

Prop 78 is a rent-seeking measure that uses the government to create an artificially segment the market so that drug companies can increase profits by price discrimination. Lower income families will pay a lower market price for drugs, a discount. But with low-income families excluded, higher-income families will pay higher market prices than they otherwise would. This will increase drug company profits but it is not a big give-away. The costs will be paid by consumers and not taxpayers. It will distort the free market and Prop 78 should be opposed on principle, but...

Prop 78 is also a compromise to prevent Prop 79. Prop 79 is an anti-business price-control measure that will adversely affect drug research and hurt consumers of drugs in the future that will not be developed. Price controls are bad for consumers because they create shortages and price controls on IP hurt consumers in the future because of shortages of future IP products not developed. Also, this is California. If both are defeated, anti-business groups and the legislature will continue to attack drug makers. The drug market is already segmented by Medi-Cal, and creating another segment would not be that bad. Without Prop 78 the legislature will probably attempt to have more drugs purchased at taxpayer expense.

Prop 78 will likely hurt the non-poor as consumers but help them as taxpayers. Prop 78 is worse than no legislation but much better then Prop 79, and is probably better than what we will end up with if neither pass. I am hesitant to recommend special-interest favored legislation, but Prop 78 has been endorsed by Schwarzenegger. If Schwarzenegger thinks we need to compromise on drugs than I think he is probably right. Because this is California, Prop 78 should get a reluctant yes vote.

The rest of the Special Election is a no-brainer. Yes on 73, 74, 75, 76, and 77 and no on 79 and 80.