On August 16, 2022, President Biden signed into law the Inflation Reduction Act, which includes several provisions to lower prescription drug costs for people with Medicare and reduce drug spending by the federal government. Under the new law, the federal government will negotiate prices for high-cost drugs covered under Medicare to prices significantly lower than current market prices. The law addresses profit gouging by drug manufacturers, who are enjoying record profits as seniors struggle to pay for essential medications. The law also requires drug manufacturers to pay rebates to Medicare if they increase prices faster than inflation for drugs used by Medicare beneficiaries. The inflation rebate provision will be implemented in 2023, using 2021 as the base year for determining price changes relative to inflation. As Tom Foley, senior economist with the CBO noted, “Essentially the law is reducing pharmaceutical profit levels to zero. The law flattens supply for essential drugs to a price that is affordable to seniors but still allows drug manufacturers to cover their costs."

A. Draw a market for prescription drugs purchased by persons over the age of 65, labelling initial curves, price and quantity with subscript “1”.

B. Cite a 10-20 word phrase from the article that speaks to a change in the market for prescription drugs purchased by persons over the age of 65.

C. Identify the economic factor that is changing the market for prescription drugs purchased by persons over the age of 65.

D. Return to the market and make changes to the market consistent with information in the article and the quote of economist Tom Foley, labeling new curves and new price and quantity with subscript “2”.

E. Starting with the definition, in less than 40 words argue whether the prescription benefit under the Inflation Reduction Act is socially efficient.

F. Starting with the definition, in less than 40 words argue whether the prescription benefit under the Inflation Reduction Act is productively efficient.

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