The Economics of the FDA

Our class is now knee-deep into The Economics of Public Issues an excellent book for those with little training in economics but who want to see how economists analyze social issues. We will be reading two chapters a day until we are finished. Highly Recommended!

The FDA's mission is to regulate the safety and efficacy of drugs and medical devices in the United States. We talked at length about the two different types of errors that can be made by Federal regulators:

1. Type I Error--This occurs when the FDA approves an unsafe drug
2. Type II Error--This occurs when a safe drug is rejected

* Assuming the null hypothesis is that all drugs are unsafe

This lead to a discussion of how regulating drugs will inevitably be bad for some people. Federal regulators are very sensitive to type I errors because they are visible, whereas type II errors mostly go undetected. The issue is then, what is the trade-off here? We can be REALLY safe by banning all drugs (which leads to some people dying because of non-availability) but this is hardly reasonable from a cost-benefit viewpoint. The question for economic efficiency is, "What is the appropriate level of safety that balances Type I and Type II errors?"

A nice website that explores these and related issues (such as, is the FDA really necessary?) is provided by Alex Tabarrok of George Mason University. FDA Review evaluates that costs and benefits of FDA policy and is a good source of information on how economists view these issues.