Graduate Capstones

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Two-part tariff: a method to induce firms to supply novel antibiotics in Canada
(2023-05-29) Hill, Alexia; Fellows, Kent
Canada does not have enough access to novel antibiotics to combat the growing threat of antibiotic resistance. This is due in part to short and long run market failures like externalities and market power from economies of scale. There are also imposed market restrictions on use, the stochastic nature of resistance, the interconnection to livestock and agriculture, and the patchwork drug coverage in Canada that further complicate the market. In this paper, I propose a subscription model, in the form a two-part tariff, to induce firms to develop and sell novel antibiotics in Canada. This model can financially incentivize firms by compensating them for the high fixed costs of research and development. The subscription model breaks the link between quantity and profits as the total fee is paid regardless of quantity used. The subscription fee can be determined using the expected value as an upper bound and producer profit, as determined through a rate of return calculation, as a lower bound.