Tabarrok and Murphy: Why Are US Drug Prices So High?

by Stephan Kinsella on June 9, 2025

In a recent Human Action podcast episode, “Why Are US Drug Prices So High?,” Bob Murphy and Alexander Tabarrok discuss drug prices, President Trump’s recent “Executive Order: Delivering Most-Favored-Nation Prescription Drug Pricing to American Patients,” and related policy like patent law.

Their shownotes:

Economist Alex Tabarrok joins Bob to review Trump’s executive order on prescription drug pricing. They explore how price discrimination works in global pharmaceutical markets, the unintended consequences of importation policies, and why U.S. consumers often pay more—yet benefit most from drug innovation. Tabarrok also critiques the FDA’s role in delaying treatments and explains how regulatory reform, not price caps, could make healthcare more affordable and effective.

Alex’s Article, “Econ 101 is Underrated: Pharma Price Controls“

(Grok summary; ChatGTP summary)

Tabarrok seems to be generally pro-free market and an Austrian or fellow traveler. However, although he sometimes criticizes existing IP law, he is not opposed to intellectual property (IP), unlike all the cool Austro-libertarians.¹ And he often proposes changes to IP law—sometimes outrageously goofy ones, such as his truly insane idea of replacing the patent system with $3.5 trillion worth of taxpayer subsidies (if you take his logic for a taxpayer funded “medical innovation price fund” to its limit apply it to all forms of patented innovation and other forms of IP like copyright) (( $30 Billion Taxfunded Innovation Contracts: The “Progressive-Libertarian” Solution; Libertarian Favors $80 Billion Annual Tax-Funded “Medical Innovation Prize Fund; What’s Worse: $80 Billion or $30 Million?. )) or based on simplistic assertions or confusions like the idea that we can empirically know that we are on the “wrong side” of the optimal patent term length on his ridiculous “Tabarrok Curve.”²

So even though he’s not against IP and thus not a very good libertarian, and he’s not a Misesian since he seems to think utility is cardinal, measurable, and knowable,³ and he’s not an IP law expert either, he keeps trotting out proposals to “reform” IP, such as, I guess, banning free trade or urging that the US engage in IP imperialism to twist the arms of other countries like Australia (see below) to adopt the stronger US patent protections that Tabarrok seems to want to reform.⁴ For example, he doesn’t seem to know what the patent term is, even though he apparently somewhat pro-patent. After all, his “Tabarrok Curve” implies we have “gone too far” (he also says this around 31:00) and that patent and copyright terms are “too long,” and he implies here the patent term is too low because of FDA delays and thus favors legislation such as the 1984 Hatch-Waxman Act that provide for patent term extension of up to 5 years when there is delay caused by regulatory review, e.g. from the FDA (see 32:00). Tabarrok also seems to think the patent term is 15 years (11:04). However, the patent term is 20 years from date of filing, not 15; and since it usually takes 2-3 years⁵ before it issues, most issued patents have a term of about 17 to 18 years. Does this mean Tabarrok would say that the Patent Term Extension of Hatch-Waxman “goes too far” since, after all, the 17 year patent term is already 2 years longer than Tabarrok seems to think is already too long? One doubts it.

Murphy, to his credit, is anti-IP,⁶ though he doesn’t really challenge Tabarrok’s pro-patent arguments and assumptions, perhaps because he’s playing host here and their time is short. I don’t need to be so nice.

I, of course, oppose IP and have written and spoken on the pharma/patents/FDA issue in particular (see the Appendix). I’ve also criticized Tabarrok’s IP views and his confused proposals for “reform,” e.g.—

I dashed off a quick tweet about this episode and will elaborate here, as briefly as possible to avoid getting too mired in Brandolini’s Law. Tabarrok was critical of Trump’s proposal to try to lower US prescription drug prices by getting pharma companies to somehow charge no more than the lowest price (“most favored nation” or MFN) charged in any other developed economy. Many other libertarians were also critical, either because they are pro-patent or because they view this as some kind of price control.⁸

Drug Reimportation

Murphy starts by noting that it was unclear how exactly the Executive Order would achieve lower or MFN prices, but that it seems one mechanism would be to permit imports of drugs sold abroad at the lower prices. Of course the pro-patent types do not want this because it’s way to undercut the monopoly price being charged, do to patents, in the US, and the whole point of granting patent rights is to permit pharma companies to charge above-market prices—to “recoup their costs.” This is in fact why several Cato-associated scholars, Doug Bandow, Michael Krauss, and Richard Epstein, came out against drug reimportation about 20 years ago because patents mattered more to them than free trade.⁹ And it’s one reason Tabarrok opposes it now, as does the Wall Street Journal, “libertarian” Justin Amash, and others.¹⁰ Even Thomas Sowell trots out a stupid argument against free trade (in the book Murphy mentions at 18:30 or so), because he doesn’t want to undermine the ability of pharmaceutical companies to charge monopoly prices!¹¹ My God! You’re all a bunch of socialists! (to quote Mises,¹² himself a socialist¹³ on the IP issue).¹⁴

At 3:07–37:

Murphy: It looks to me that as if this executive order is saying at the very least we will lift that barrier to make sure that Americans are not paying whatever it is three times more for this quote exact same drug as somebody in in Europe is or what whatnot okay so I’ll I’ll stop there and go ahead Alex take it away.

Tabarrok: sure so the irony the irony here is that uh you know Trump wants to stop uh imports uh from all over the world except he wants to import price controls from Canada.

Price Controls

Let’s get this straight: US and Canadian patents permit pharma companies to charge monopoly prices, and Canada limits this so that the pharma companies still charge a monopoly prices but just not as much as they can get away with in the US. Allowing a company to charge extortionate, monopoly prices but less than they otherwise could is hardly a price control. And allowing free trade so that consumers or others can engage in arbitrage to purchase cheaper products sold in Canada and import them into the US for resale or consumer use is not “importing price controls.” (Hell, subjecting companies that apply for and assert state-granted patents to limits on how they can use these anti-competitive monopoly privileges is not exactly unjust, whether it be regulations, taxes, anti-trust law, etc.)¹⁵

Even Grok knows this:

Under your assumption that patents are illegitimate and enable monopoly pricing, it is partially fair to say that Canada’s MAP controls are not “genuine” price controls, as they primarily reduce the excessive prices caused by patent monopolies rather than setting prices at the competitive free-market level (e.g., generic prices). For example, Eliquis’s MAP ($900/year) is far below the U.S. monopoly price ($6,700) but above generic anticoagulant prices (~$100–$300/year). However, the MAP is a genuine price control in the economic and regulatory sense, as it legally caps prices below what manufacturers would charge in a patent-driven market, with enforceable penalties (Patent Act, Section 83). The statement overstates the case by ignoring the MAP’s binding nature and significant price reductions, but it captures the idea that the MAP operates within the patent system rather than dismantling it.

7:06–8:05:

Murphy: Is it true, Alex, that Americans in general are paying—like there’s this this tiered system where the big pharma companies, they have a lot of R&D costs, and the way they deal with that is they charge a lot higher price for “the same product” to Americans than they do selling the same pills abroad. Is that basically true?

Tabarrok: Yeah partially it’s true. So the true part is this. For drugs which are on patent—branded drugs—they are more expensive in the United States than elsewhere in the world. And yes, the reason is that indeed we have more of a free market—putting aside the patent, you know we can debate patents, but putting aside the patent [issue]—we have more of a free market in the United States than in other countries. So other countries put price controls on these drugs. So to a certain extent you can argue that other countries are so-called free riding, you know taking advantage of the fact that these drugs have been created.

As noted above, it’s not a price control if Canada puts limits on how much a pharma company can use the Canadian-granted patent to extort buyers. It just means that the price charged in Canada—still a monopoly, above-market price—is not as high as it could be. And even if it was a price control, there is nothing wrong with buying a product willingly sold by a pharmaceutical company, for a profit, in Canada, and importing it to the US to get a cheaper price or engage in arbitrage and undercut the inflated US price. We libertarians support free trade, remember? As least Cato realized this when it slapped down its three errant scholars and reasserted its support for free trade and drug reimportation¹⁶ even if it meant it would be harder for its Big Pharma donors to extort consumers to “recoup their costs.”¹⁷

Price Discrimination

8:33—9:00:

Tabarrok: These are products with very high research and development costs and low marginal costs so the way I put it is you know the first pill cost a billion dollars, the second pill cost 50 cents, so when you have a product like that, one of the few ways that you can support all of that research and development is to so-called price discriminate.

Well this is fine and there is nothing wrong with price discrimination, but there is also nothing wrong with free trade, drug reimportation, arbitrage, and competition, especially when the price charged even in other industrialized countries is still an patent-inflated price that permits a profit. Moreover, the logic in favor of patents, due to FDA-imposed costs, is exaggerated, it is not so easy to gear up and make a generic,¹⁸ and there are better solutions to these supposed FDA-cost-recoupment problems than granting patents to companies to allow them an arbitrary period of time to extort people and legally scare off competitors—or restricting free trade by calling it it “importing socialism”—such as my FDA and Patent Reform: A Modest Proposal—but certainly not Tabarrok’s nutty idea of replacing the patent system with $3.5 trillion worth of taxpayer subsidies (if you take his logic for a taxpayer funded “medical innovation price fund” to its limit apply it to all forms of patented innovation and other forms of IP like copyright).¹⁹

I.e., Tabarrok is right that perhaps price discrimination is good and reasonable and needed, even if, or maybe because of, market distortions like regulatory costs (FDA), patent-inflated prices, quasi-price controls from national health service monopsonies,²⁰ but this does not mean that free trade and arbitrage should be prohibited just to make it easier for Big Pharma patent whores to engage in price discrimination! And it doesn’t explain why Americans should be the ones to pay the “full” (patent-amplified) prices to subsidizes the rest of the world! In Sowell’s argument against drug reimportatin, he gives no reason whatsoever for why Americans have to pay higher costs than Canadians.²¹

I mean as Murphy points out, it’s hard to engage in price discrimination:

okay and so then one of the things though that needs to happen for price discrimination to be an option for the seller is they it can’t be easy for the people who buy at the low price just resell to the other people. (16:03–16:12)

This is the same reason it’s hard for companies to collude or maintain cartels. ²² Price discrimination should be permitted (just like price collusion, tying arrangements, and so on should be permitted) but free trade and arbitrage should not be prohibited just to make it easier to get away with it.

In fact, shouldn’t Tabarrok, Sowell, and others who oppose free trade because it prevents price discrimination also oppose Medicare etc. having the right to bargain or negotiate at all?²³ I guess we should just pay whatever Big Pharma demands. We don’t want to make it harder for them to “recoup their costs”!

“Allowing” Free Trade and Drug “Reimportation”

I mean here is Tabarrok saying free trade—importation (or “reimportation”) of drugs should not be “allowed”: notice the key word here:

16:46–17:30:

Murphy: for a drug company that has to spend a billion dollars upfront figuring out the formula going through all the tests and everything so it’s it can legally sell it in the US market, then to say oh given that we went through all that now yeah on the margin it only cost 50 cents a pill we can make an extra $200,000 a year by mass-producing it and selling it at you know a dollar a pop for this country over here… but for that to work you can’t allow some company then to mass import from that little dinky country over here and sell it to Americans at $5 a pill because then you know you don’t do that… so … is that the general logic?

Tabarrok: Yes, absolutely, and notice that if you did allow reimportation—I mean it’s tempting, right? You would think, oh Americans can get much cheaper drugs just by allowing them to reimport them from the poorer country where they have the lower prices. Well if that happened of course the pharmaceutical companies would not sell the drug at the lower prices to the poorer country, they just raise the price for everybody.

[And at 18:20–19:18] Murphy: I think Thomas Sowell covered this example— I think it was in his book Advanced Economics as opposed to like the basic economics book—(( Applied Economics: Thinking Beyond Stage One, ch. 3. )) but and he made the point you just did: that “yeah, it’s tempting to think if we just allowed for the reimportation, then it would bring the price down here; but no, it’s the other way around: the pharmaceutical companies, realizing that’s the issue then, would just stop selling at the low price abroad. … So am I correctly inferring your position, Alex, that you’re saying it’s analogous to you know these leftist progressives who see a bunch of billionaires walking around like “Oh why don’t we just take 90% of their wealth they’ll still be rich.” And then, yeah you could do that, but at best it would be a one-shot thing, because then, you know, they would stop generating that wealth in the first place, and then that hurts everybody. So likewise here, yeah it looks like there’s some low hanging fruit, we got these pills selling at a dollar a piece abroad, and Americans are paying $50 for them but if you allow that to come back in all of a sudden that would disappear.”

So you see, we should not allow trade and arbitrage in pharmaceuticals because that makes it too hard for Big Pharma to engage in the price discrimination it needs to engage in to successfully charge monopoly prices so as to reduce needlessly imposed FDA costs! That‘s free market?! You see, all these pro-IP types love IP and monopoly prices more than they like free markets, competition, and private private property rights. In fact, as I have pointed out before, IP advocates hate competition. Oh, they’ll tolerate it in the analog world where competing is expensive, slow, and hard, where it’s easier to make a profit and not worry so much about competitors, but when it’s too easy to compete with a new business and harder to “recoup costs,” i.e. make a profit in the face of competition, the IP advocate wants to slow down that pesky market competition. I mean who wants “unbridled competition,” amiright? Because what we believe is that a “privileged, monopolistic domain operating on the margins of the free-market economy promotes long-term cultural and technological progress better than a regime of unbridled competition.”²⁴ That is, if “properly calibrated”²⁵ —you know, like Tabarrok’s proposed $80B “medical innovation price fund” (that is really $3.5 trillion in the end).²⁶ After all, as “free market” Independent Institute economist William Shughart assures us, we need IP to slow down competition and the “diffusion of new ideas”:

Granting a temporary monopoly to the rare breakthrough is necessary, therefore, to provide its inventor with an opportunity to earn a return on the investment that led to the new idea – and to encourage additional such investments. Such protection is especially important in the pharmaceutical industry, where, in its absence, new drugs could be duplicated by competitors, and the incentive to invest would disappear, stifling the discovery process.

To paraphrase the late economist Joan Robinson, patents and copyrights slow down the diffusion of new ideas for a reason: to ensure there will be more new ideas to diffuse.²⁷

Hey, Thanks, Tabbarok, but no thanks! I likes my free market competition like I likes my women: unbridled and unhampered! While we’re at it, I want my free market totally untrammeled!²⁸

Free Trade Agreements and IP Imperialism

At 21:31, Tabarrok praises the US-Australia “free trade” agreement because it forced Australia to amp up its local patent protections. He says (21:30):

If we want to solve this issue of increasing global research and development okay, we want to increase the incentives to do research and development globally okay, then the way to do that is painful, ugly, time-consuming, and it’s to have a bunch of free trade deals.

I’m surprised he doesn’t instead suggest extending his $80 Billion taxpayer-funded “Medical Innovation Prize Fund” idea globally. As I noted, if you extend the logic of this idea to all forms of innovation covered by patent and copyright, and not pharma or medical technology, this would result in something like $3.5 trillion worth of taxpayer subsidies in the US alone. If we scale this globally, let’s make this 4 or 5 times bigger, say, $17 trillion a year and instead of duplicating effort in each country, let’s have it handled by the UN’s World Intellectual Property Organisation or the World Trade Organization.Now we’re cooking with gas! That’s some great “free market” thinking there! I mean, with free market friends like this, who needs enemas? Anyway, he doens’t propose this, for some reason; I better shut up before I give him any idea.

No, he proposes free trade agreements as the way to incentive innovation and R&D. Or does he? Yes, property rights, capitalism, and free trade are the real keys to wealth and thus to innovation, but Tabarrok opposes property rights (IP violates property rights) and unhampered capitalism (need IP to protect companies from competition and market failure).²⁹ And the free trade agreements he wants are not simple agreements that, you know, reduce tariffs so that, you know, trade is possible, but “free trade” agreements that require our vassals to adopt our own insane, socialist, Draconian IP laws into their own local and domestic law!

As I have pointed out many times,³⁰ free trade agreements and investment agreements/treaties are different, and neither one, especially the former, has (that is: should have) anything to do with IP rights. IP rights are domestic only, as all property rights are.

As for free trade treaties: ideally, each country should adopt unilateral free trade and not impose tariffs on imports.³¹ But if there are to be bilateral or multilateral free trade agreements, the main purpose should be to mutually lower barriers to free trade, mainly import tariffs. Such agreements have nothing to do with the property rights provided in the other country’s legal system. For example, the US can have an agreement with a managerial/socialist country like China or India regardless of what type of economic system and property rights are protected locally. A free trade agreement with, say, China, should not require China to change its local property rights laws or tax rates, to adopt a capitalist system, to respect human rights, blah blah blah, any more than China would require the US to change its own local property or civil rights. It’s about free trade.

In addition to free trade agreements, Western countries often negotiate so-called bilateral investment treaties (BITs) with developing countries to protect the foreign investor’s property rights in that country so that foreign investors are more likely to invest there.³² (These agreements are usually bilateral, not multilateral; an attempt at this years ago, the Multilateral Agreement on Investment, ago stalled.)³³ Reducing the political risk of expropriation of foreign investment is good for both the host state and foreign investors. Such an agreement also does not need to require the host country to change its property rights but only to agree to “internationalize” the agreement to “freeze” the current law into place–a so-called “stabilization clause”³⁴ —so that the host state is prohibited by international agreement and international law from expropriating the foreign investor’s property contrary to the agreement. It would not need to require the host state to adopt US-style patent law, for example. At most, it would require the host state not to take away any patent rights or copyright granted to the foreign investor under the host state’s own municipal (domestic) IP law. There would be no call for such an agreement to require the host state to strengthen its local IP rights.

And yet this is what the US does: it bullies other countries into adopting stronger patent and copyright rights as the price of negotiating with the US. Apparently Tabarrok is fine with this IP imperialism.

As he says, continuing the previous quote (22:00–22:50):

and we have done that in the past. We have a 2005 free trade deal with Australia, and part of that deal is that Australia agreed that they will respect, to a greater extent, American patents or patents on pharmaceuticals, and they will have higher prices. Now of course, they don’t want to say that in Australia, but that was the upshot of the deal. And that makes sense. I think if that’s what we want to do, you know there are ways of doing that, there are ways of putting pressure on other countries to contribute to research and development expenditures.

Here Tabarrok praises the US for doing this—for twisting the arm of Australia in 2005 when negotiating a “free trade” agreement to expand its IP protection for pharma patents—and also extended its copyright term from life of the author plus 50 years to life plus 70,³⁵ to match the insane US term which had been extended in 1998 at the behest of Disney—The Sonny Bono Copyright Term Extension Act of 1998, aka the Mickey Mouse Protection Act. (Why Tabarrok is in favor of the US pressuring Australia to increase its copyright term by another 20 years is a mystery, as he elsewhere says he thinks IP has gone too far—e.g., at 31:00 here, citing his book, and in his Tabarrok Curve, though that dealt with patents not copyright.)³⁶ Such IP Imperialism is common by the US IP bully; both Canada and Japan, for example, extended their own copyright terms as a result of TPP negotiations, even though it was never completed or ratified.³⁷

But free trade agreements have nothing to do with local property rights; that is the province of BITs, as noted above, which are usually negotiated between a developed country and a developing country. So here we have so-called IP reformer who says IP protection is too strong³⁸ but he gets the term of patents wrong, and thinks they should be extended anyway, and favors US IP imperialism to force other countries to extend their own copyright terms.

At 32:19—33:00:

Tabarrok: The second point is, whatever your perspective on IP, everyone agrees pharmaceuticals are the hardest case. So everybody agrees that, you know, whatever you think about copyright or you know patents on software—pharmaceuticals are really the tough case. Because it is the case that the formula costs you a lot, whether it’s a billion dollars or not, okay—it costs you a lot, and the marginal cost, once you know the formula, is very very low. So pharmaceuticals are the case for IP, for patents.

He also adds:

Now this raises the issue what else could we do to reduce the costs of new pharmaceuticals, and as you know I’m a big proponent of reducing the FDA rules, and making it cheaper. So I think that’s one thing we could do.

Sure. See my FDA and Patent Reform: A Modest Proposal. But the fact of the FDA does not justify the patent system. At all.

This pro-IP argument is to common as to be tedious. For example, from Richard Posner:

To provide a little bit of an analytical framework for discussion of the optimal amount of patent protection, it’s useful to evaluate patent protection as follows. You consider the cost of inventing and the cost of copying the invention. And the higher the ratio of the cost of inventing to the cost of copying, the stronger the case for a patent protection. And the ratio is very high for pharmaceutical drugs.³⁹

Except: it’s not. The case that pharmaceuticals is an obvious one in favor of patents often repeated but simply wrong.⁴⁰ Tabarrok is wrong that “everyone agrees” that it’s the “strongest case” for IP. I, for one, do not and in fact, to the extent pharmaceuticals are good and necessary, patents should be abolished especially in fields where the innovations are important. Patents kill people by raising prices, reducing competition, and distorting innovation, and this includes impeding and distorting pharmaceutical and medical innovation. Down with patents, especially for pharmaceuticals!