COMMENTARY

The article talks about the price control for bare metal stents (BMS) and drug eluting stents (DES) in India.
Stents are tiny metal tubes used in medical procedures at hospitals.
Price control refers to the setting of minimum or maximum prices by the government so that the prices are
unable to adjust to their equilibrium level determined by demand and supply. In the article the type of price
control imposed is a price ceiling. A price ceiling is a legal maximum price for a particular good set by the
government.

Figure 1 depicts a graph which shows the impact of a price ceiling on the quantity demanded and supplied.

Consumer Surplus is defined as the highest price consumers are willing to pay minus the price actually paid.
Producer surplus is defined as the price received by firms for selling their goods minus the lowest price they
are willing to accept to produce the goods. The sum of consumer and producer surplus is known as social
surplus. Deadweight loss is defined as the loss in producer and consumer surplus due to an inefficient
allocation of resources. Positive externalities of production refer to external benefits created by producers.

At equilibrium, the price of Bare Metal Stents is Pe and the quantity demanded and supplied is Qe . The
consumer surplus is equal to areas a + b. Producer surplus is equal to areas c + d + e. Social surplus is
maximum (a + b + c + d + e) and there is allocative efficiency (since Marginal Benefit = Marginal Cost) in the
BMS market.

After the price ceiling Pc is set by the government, the price of Bare Metal Stents moves from Pe to Pc . At
price Pc the quantity supplied is Qs and the quantity demanded is Qd . Now the consumer surplus is equal to
areas a + c. Producer surplus is equal to area e. The total social surplus is equal to areas a+c+e. The social
surplus lost after the imposition of the price ceiling is equal to areas b + d. This area (b + d) represents the
deadweight loss which shows the benefits lost to society because of the imposition of price ceiling on Bare
Metal Stents.

In Figure 1, the quantity demanded is greater than the quantity supplied, which leads to a shortage. This
shortage is equal to Qd - Qs. This means that at price Pc not all consumers willing and able to buy BMS in
India are satisfied. This leads to Non-Price Rationing. Non-Price Rationing is defined as a method of
distributing the quantity of a good amongst consumers in a manner that is not determined by the free market
demand and price equilibrium. Non-Price Rationing includes use of the first come - first serve principle and
favouritism, which leaves a portion of consumers unable to buy BMS.

The shortage also causes the formation of underground markets. Underground markets are defined as markets
that involve buying/selling transactions that are unrecorded, and are usually illegal. The underground market
emerges because there are dissatisfied consumers who have not succeeded in buying BMS because of the
shortage, and are willing to pay more than the ceiling price to get it. If there were no shortage, the price of
BMS would be at its equilibrium price, and no one would be interested in paying a higher than equilibrium
price for it.

The Price Ceiling leads to many consequences for the stakeholders. For consumers, those who are able to buy
Bare Metal Stents at the lower price are better off. However, some consumers remain unsatisfied because at
the ceiling price the quantity of BMS is not enough to satisfy all demanders. With respect to Figure 1,
consumers lose area b due to the price ceiling but gain area c from producers.

Producers are worse off, because with the price ceiling they sell a smaller quantity of BMS (Qs) at a lower
price(Pc).The revenue of producers falls from Pe × Qe to Pc × Qs . This is also seen in the form of the loss of
producer surplus area c and area d. Therefore, in order to reduce the cost of production and maintain their
revenue, producers may use cheaper metals for producing BMS, leading to worse quality of BMS sold.The
price ceiling on BMS may lead to some producers exiting the stents industry in india

For workers, the fall in output of producers from Qe to Qs results in unemployment leaving them worse off
due to the price ceiling.

The government does not gain or lose any amount of its revenue due to the price ceiling and is mainly
unaffected. The government may gain some popularity among consumers who benefit from the price ceiling.
However, the government could be forced to spend more money from its budget in order to keep the
underground market in check. In order to combat the shortage of BMS, the government should provide
subsidies to producers to incentivize them to increase supply. Thus the price ceiling would lead to greater
government expenditure into the BMS industry.

Works Cited
Tragakes, Ellie. Economics for the IB Diploma. W. Ross MacDonald School Resource Services Library,
2017.

http://ibguides.com/economics/notes/price-controls

https://smallbusiness.chron.com/advantages-disadvantages-price-ceiling-25210.html

https://mru.org/courses/principles-economics-microeconomics/price-ceiling-shortages-reduce-quality