Drug reimportation

Jeffrey Miron makes the case against the American ban on re-importation of prescription drugs.

He doesn't note that, in the absence of the American ban, other countries would likely work pretty hard to keep Americans from importing their drugs.

Basically, most countries, New Zealand and Canada included, massively free ride on American investment in drug innovation. The pharmaceutical companies recoup their investments by selling at high cost in the United States, but other countries with block buying agencies run by governments negotiate lower prices. We'd expect this in price discrimination models where countries differ in income and the marginal cost of production is much lower than the average cost.

But successful price discrimination strategies require an absence of arbitrage. If the US were to drop its ban on re-importing drugs from Canada, the Canadians would have strong incentive to keep Americans from buying large quantities of drugs for re-import lest the American companies decide the Canadian market not really worth the hassle, or at least not a market that gets a discount relative to US prices. Consequently there's no need for the US to bear the costs of enforcing such a ban. At worst, US drug companies stop selling at a discount to foreigners. Things get more complicated if the foreign threat is to eliminate IP on drugs in retaliation, but that seems pretty unlikely given how folks seem to be jumping to sign on to insanely strict levels of IP protection.