The Market Kills Its Own Heroes

 When a Life-Saving Drug Cannot Survive the Market

What should happen when a company develops a drug that society urgently needs? Most people would say that this company should succeed, as an efficient market should give high return to goods with high demand compared with its supply. However, the story of Achaogen, a biotechnology company developing a new antibiotic called Plazomicin, isn’t like this.

 

Achaogen spent 15 years and hundreds of millions of dollars to develop Plazomicin, a new antibiotic to treat superbacterial infections that can no longer be cured by previous antibiotics. But less than a year later, they went bankrupt. Their core assets were sold for only $16 million (Wells, Nguyen and Harbarth, 2024). It’s a really amazing business story. It shows how the market will fall when private incentives couldn’t match social value. So here's the question, why can’t an invaluable drug support the success of the company that developed it?

 

Plazomicin was so powerful that doctors refused to prescribe it widely, keeping it locked away as a last resort so bacteria wouldn't develop resistance to it. Completely the right medical call, but it’s completely catastrophic for business. With barely any sales and a healthcare system that didn't reward innovation, the company couldn’t survive.

 

Market Failure in the Antibiotic Industry

The collapse of Achaogen is a market failure rather than a business failure. To understand why Plazomicin couldn't survive in the market, we must look at marginal private benefit (MPB) and marginal social benefit (MSB) of consuming Plazomicin.

Figure 1: Negative Externality

 

Take a look at Figure 1. In reality, the cost of producing additional medicine is constant and that’s our horizontal marginal private cost (MPC) line. The marginal social cost (MSC) and supply (S) curves are identical to MPC. Imagine that producing Plazomicin doesn’t generate negative effects on the environment and society. However, consuming more Plazomicin would lead to a significant and increasing marginal external cost (MEC_C), as antimicrobial resistance is one of the top global public health threats, and the overuse of antimicrobials is the main driver in the development of drug-resistant pathogens (World Health Organisation, 2023). Also, the level of resistance is correlated with the level of antibiotic administered (Bell and Gouyon, 2003). The MPB and demand (D) curves are negatively sloped. Imagine when you’re ill and take one unit of medicine, the condition would become better obviously. However, after consuming the second unit, the effect wouldn’t be as visible as the previous one. The MSB equals MPB – MEC_C.

If the government doesn’t control using antibiotics, the equilibrium would be at point A. However, under Q₂, the society bears too much risk that this kind of antibiotics would lose its effect soon because of the overuse. Therefore, the state must use policies to limit people to use it, controlling the equilibrium from A to B and the quantity from Q₂ to Q_1.

 

Misaligned Incentives and Moral Hazard

The persistence of Q₂ is driven by the moral hazard among consumers. More antibiotics use can bring clear private benefits. Patients using more of it would recover quicker. However, there’s a wider cost, like more antimicrobial resistance, fewer effective drugs in the future and greater pressure on the health system. It’s not only attributed to some specific consumers who overuse antibiotics, but also affects the whole society.

 

That’s where the incentive problem comes in. Patients may consume antibiotics all the time until their MPB matches MPC, even though the MSC is much higher.

 

What’s more frustrating is that it’s in stark contrast to the situation in the pharmaceutical industry. Companies which develop new antibiotics face the opposite incentive problem. They need to bear huge research and development costs and face years of uncertainty. Even if it is successfully listed, the economic return may be negligible (Wells, Nguyen and Harbarth, 2024). The collapse of the Achaogen company after the launch of Plazomicin is a strong example of this broken system. Innovation comes with risks, but the market does not provide enough rewards to maintain such innovation.

 

Therefore, the antibiotic market has suffered a double blow. For companies trying to solve this problem, the market returns are often unsatisfactory. On the other hand, it underestimates the costs of action that exacerbate the problem. This kind of social cost is extremely huge. According to the Centers for Disease Control and Prevention (CDC), antimicrobial resistant infections affect more than 2.8 million people in the United States every year. Also, it causes more than 35000 deaths (CDC, 2024).

 

For that reason, antibiotic resistance should not be seen only as a medical problem. It’s also an economic problem driven by misaligned incentives.

Why Can’t the Market Correct Itself?

If the incentive mechanism is so distorted, why can't the free market solve it? Coase's theorem refers that if property rights are defined, private sectors can negotiate to get an efficient outcome.

 

However, the example of antibiotics is not suitable here. No one can easily own or trade the future effectiveness of drugs. Also, affected populations include patients, hospitals and governments in many countries, so transaction costs are huge. Therefore, the government's structural intervention is essential.

 

Curing the Market

So, how could policymakers intervene both overconsumption and underinnovation?

1. Reduce the use of antibiotics: Policymakers need to reduce unnecessary use of antibiotics. This doesn’t mean to set the price higher. Patients in need shouldn’t be excluded. A more effective method is to manage stricter. Stricter prescription rules should be utilised to ensure that strong drugs like Plazomicin are only used when truly necessary.
2. Delinking Profit from Volume: The government should decouple profit from volume to solve the dilemma. The British National Health Service (NHS) recently launched a subscription model, which requires a fixed annual fee to get new antimicrobials, no matter how many pills are actually prescribed (National Institute of Health and Nursing Excellence, 2019). This cuts off the link between profit and sales, thus rewarding those companies that develop drugs.

In conclusion, the collapse of Achaogen is not just a story of a failed company. It also reminds us how important it is to recognize the limitations of the market. We need Plazomicin, but we also need to use it carefully. Therefore, the usual market logic is not applicable. Without strict policy intervention to protect innovations, the tragedy of Achaogen may occur frequently, and the society will continue to lose valuable medicines.

References

Bell, G & Gouyon, P.H. (2003). ‘Arming the enemy: the evolution of resistance to self-proteins’, MICROBIOLOGY SOCIETY, 149(6), pp.1367. https://doi.org/10.1099/mic.0.26265-0. (Accessed: 7 April 2026).

 

Centers for Disease Control and Prevention (CDC) (2024). Antimicrobial Resistance Facts and Stats. Available at: https://www.cdc.gov/antimicrobial-resistance/data-research/facts-stats/index.html. (Accessed: 7 April 2026).

 

National Institute for Health and Care Excellence (NICE) (2019). A new model for evaluating and purchasing antimicrobials in the UK. Available at: https://www.nice.org.uk/what-nice-does/life-sciences-how-to-get-your-product-to-market/a-new-model-for-evaluating-and-purchasing-antimicrobials-in-the-uk.(Accessed: 7 April 2026).

 

Wells, N., Nguyen, V.K. and Harbarth, S. (2024). Novel insights from financial analysis of the failure to commercialise plazomicin: Implications for the antibiotic investment ecosystem. Humanities and Social Sciences Communications, 11, 941 (2024). Doi: https://doi.org/10.1057/s41599-024-03452-0. (Accessed: 4 April 2026).

 

World Health Organisation (2023). Antimicrobial resistance. Available at: https://www.who.int/news-room/fact-sheets/detail/antimicrobial-resistance. (Accessed: 18 March 2026).

Why Your Health Insurance Costs a Fortune (Blame the Lemons)

 

As a student I do silly things, but I am healthy for the most part. I rarely find myself needing healthcare. But-and this is a big but- the time I needed it recently, I was shocked to find how expensive it was. 

But why is private health insurance necessary in the UK I hear you ask? Many reasons: long waits, unsatisfactory care and underfunding are seen in the NHS. Private healthcare insurance can be the answer to these issues. But we need it to be affordable…

Having investigated healthcare insurance more, I discovered there are countless issues surrounding the provision of what is presumed to be a necessary good. I found that at the centre is one idea: asymmetric information, and from there two consequences arise: adverse selection and moral hazard. I appreciate this sounds very confusing, and it did to me at first too, so let me elaborate.

 

Problems behind problems

At the heart of this issue is asymmetric information: when one party has more information than the other. Simply put, adverse selection occurs due to asymmetric information. Insurers struggle to verify applicants’ health status, costing them significant amounts of money due to unexpected costs. They recover this by increasing their insurance premiums. This creates a situation where people who are healthy are unwilling to buy insurance at higher prices. This creates an endless cycle where only unhealthy people buy insurance. This is where the market starts to break down. Scary!

A fruit market?

A simple analogy is seen through Akerlof’s work on peaches and lemons (Akerlof, 1970). Peaches are representative of healthy people who bring low risks to health insurers. Whilst lemons represent unhealthy people who constantly make expensive claims. It’s difficult to truly know someone’s health…

Akerlof creates parallels in the second-hand car market between peaches being good cars and lemons being bad cars. Like buyers of second-hand cars, health insurers also cannot tell the difference between low risk and high-risk applicants.

The asymmetric information prompts premiums being set at a price higher than the peaches are willing to pay. As this continues to happen, more peaches leave the market. Consequently, insurance prices increase because insurers need to generate profit after the losses the high-risk lemons cause them. Premiums will be forced higher … Causing disastrous effects! People are driven out of the health insurance market, unable to easily access lifesaving services.

More and more and more issues?    

The adverse selection spiral is reported by the Care Quality Commission, which speaks on the pressing issues of the “unfair provision” of healthcare. There’s a lack of access, and an underprovision in the quality of care received, and this is particularly prevalent in disadvantaged groups. Due to health insurance companies having a lot less money, the quality of their care drops immensely. (Holt and Roberts, 2023).

Let me pose a question: if you knew that any mistake you made would be covered by someone else, would you behave more rashly? This introduces the concept of moral hazard. Moral hazard is not just about people taking greater risks. It also reflects a simple economic idea: once someone is insured, the out-of-pocket cost of healthcare falls, so treatments may feel cheaper. As a result, people may visit doctors more often or accept treatment they might otherwise avoid if they had to pay themselves. A study of Alcoa Inc employees found that more generous insurance led to over $1,200 extra in healthcare spending per person annually, because it felt “free.” (Einav et al., 2013).

The NHS is a clear effort in fixing the issues of failing private health insurance in the UK, but in the NHS, healthcare and overall standards of living can feel like a postcode lottery, with those living in privileged areas receiving better overall care than those in poorer areas. Propper (2024) touches on this: finding that though health supplies are distributed across the UK relatively evenly, people from higher socioeconomic backgrounds tend to receive better treatment quicker.    

 

Solutions?

One solution is making healthcare insurance compulsory. This will prevent peaches from leaving the market. Germany enforced mandatory health insurance, whilst focusing on self-governance, ensuring there is never an underprovision of healthcare or supplies. Compulsory insurance may keep people in the market, but it does not ensure good healthcare. This is seen through the number of people reporting Germany having good healthcare being below the European average. (Zeeb et al, 2025).

Another solution? Nudge people in. Governments can exploit a quirk of human psychology called framing. Which is our tendency to stick with whatever option is presented as the default (Kahneman and Tversky, 1981). The UK proved this works: when workplace pensions switched to opt-out in 2012, participation jumped from 42% to 86% (Department for Work and Pensions, 2023). Apply the same logic to health insurance and the "peaches" stay in the market, stabilising premiums without force.

Disclosure regulations are another option. Before taking out a premium, people would have to disclose their medical history, ensuring everyone gets priced accordingly and preventing people from exiting the market. However, this could worsen inequality — those facing illnesses would be charged higher premiums than healthy people, meaning the people who need health insurance the most could end up being excluded entirely.

 

Solutions in action

In the US, the Affordable Care Act (ACA) transformed the healthcare system. With Obama making “efforts to correct failures in insurance market practices” (Johnson and Johnson, 2023). This aimed to reduce adverse selection and asymmetric information, which would’ve driven healthy individuals out of the market. The ACA implemented policies such as income-based subsidies, improving access to healthcare; however, quality improvements were limited and gaps in coverage remain.

These solutions are unlikely to be effective in isolation and should be combined. Ultimately, The NHS was Britain’s answer to a market that failed, and seeing as private insurance still operates and inequalities persist, Akerlof’s theories remain as relevant as ever. The adverse selection spiral didn’t disappear; it just changed shape.

me pose a question: if you knew that any mistake you made would be covered by someone else, would you behave more rashly? This introduces the concept of moral hazard. Moral hazard is not just about people taking greater risks. It also reflects a simple economic idea: once someone is insured, the out-of-pocket cost of healthcare falls, so treatments may feel cheaper. As a result, people may visit doctors more often or accept treatment they might otherwise avoid if they had to pay themselves. A study of Alcoa Inc employees found that more generous insurance led to over $1,200 extra in healthcare spending per person annually, because it felt “free.” (Einav et al., 2013).

The NHS is a clear effort in fixing the issues of failing private health insurance in the UK, but in the NHS, healthcare and overall standards of living can feel like a postcode lottery, with those living in privileged areas receiving better overall care than those in poorer areas. Propper (2024) touches on this: finding that though health supplies are distributed across the UK relatively evenly, people from higher socioeconomic backgrounds tend to receive better treatment quicker.    

 

Solutions?

One solution is making healthcare insurance compulsory. This will prevent peaches from leaving the market. Germany enforced mandatory health insurance, whilst focusing on self-governance, ensuring there is never an underprovision of healthcare or supplies. Compulsory insurance may keep people in the market, but it does not ensure good healthcare. This is seen through the number of people reporting Germany having good healthcare being below the European average. (Zeeb et al, 2025).

Another solution? Nudge people in. Governments can exploit a quirk of human psychology called framing. Which is our tendency to stick with whatever option is presented as the default (Kahneman and Tversky, 1981). The UK proved this works: when workplace pensions switched to opt-out in 2012, participation jumped from 42% to 86% (Department for Work and Pensions, 2023). Apply the same logic to health insurance and the "peaches" stay in the market, stabilising premiums without force.

Disclosure regulations are another option. Before taking out a premium, people would have to disclose their medical history, ensuring everyone gets priced accordingly and preventing people from exiting the market. However, this could worsen inequality — those facing illnesses would be charged higher premiums than healthy people, meaning the people who need health insurance the most could end up being excluded entirely.

 

Solutions in action

In the US, the Affordable Care Act (ACA) transformed the healthcare system. With Obama making “efforts to correct failures in insurance market practices” (Johnson and Johnson, 2023). This aimed to reduce adverse selection and asymmetric information, which would’ve driven healthy individuals out of the market. The ACA implemented policies such as income-based subsidies, improving access to healthcare; however, quality improvements were limited and gaps in coverage remain.

These solutions are unlikely to be effective in isolation and should be combined. Ultimately, The NHS was Britain’s answer to a market that failed, and seeing as private insurance still operates and inequalities persist, Akerlof’s theories remain as relevant as ever. The adverse selection spiral didn’t disappear; it just changed shape.

Reference List

Akerlof, G.A. (1970). The market for 'lemons': Quality uncertainty and the market mechanism. The Quarterly Journal of Economics, 84(3), pp.488–500. doi:10.2307/1879431.

Busse, R., Blümel, M., Knieps, F. and Bärnighausen, T. (2017). Statutory health insurance in Germany: a health system shaped by 135 years of solidarity, self-governance, and competition. The Lancet, 390(10097), pp.882–897. doi:10.1016/s0140-6736(17)31280-1.

Claude (2026). Peaches vs lemons: Akerlof's market for lemons illustrated [Digital illustration]. Generated by Claude Sonnet 4.6 (Anthropic). Available at: https://claude.ai [Accessed: 27 March 2026].

Department for Work and Pensions (2023). Workplace pension participation and savings trends of eligible employees: 2009 to 2022. GOV.UK. Available at: Workplace pension participation and savings trends of eligible employees: 2009 to 2023 - GOV.UK

Einav, L., Finkelstein, A., Ryan, S.P., Schrimpf, P. and Cullen, M.R. (2013). Selection on moral hazard in health insurance. American Economic Review, 103(1), pp.178–219. doi:10.1257/aer.103.1.178.

Holt, A. and Roberts, M. (2023). Two-tier care crisis: People forced to pay or wait. BBC News, 20 October. Available at: https://www.bbc.co.uk/news/health-67100395 [Accessed: 29 March 2026].

Horn, P. (2023). The downward spiral [Digital image]. Medium, August. Available at: https://medium.com [Accessed: 29 March 2026].

Johnson, S.W. and Johnson, S.L. (2023). A review of the impact and evolution of the Affordable Care Act in America. International Journal of Scientific and Research Publications, 13(8), pp.25–29. doi:10.29322/ijsrp.13.08.2023.p14003.

Kelley. W.K. (2026), Asymmetric information is at the heart [Digital Image]

Mannemanna, C. (2025). Government intervention as a response to market failures in healthcare. International Journal of Science, Architecture, Technology and Environment, pp.540–544. doi:10.63680/ijsate1025054.056.

Propper, C. (2024). Socio-economic inequality in the distribution of health care in the UK. Oxford Open Economics, 3(Supplement_1), pp.i577–i581. doi:10.1093/ooec/odad090.

Tversky, A. and Kahneman, D. (1981). The framing of decisions and the psychology of choice. Science, 211(4481), pp.453–458. doi:10.1126/science.7455683.

 

Zeeb, H., Loss, J., Starke, D., Altgeld, T., Moebus, S., Geffert, K. and Gerhardus, A. (2025). Public health in Germany: structures, dynamics, and ways forward. The Lancet Public Health, 10(4). doi:10.1016/s2468-2667(25)00033-7.

 

Buy Now, Pay Later: The Hidden Cost of Splitting Reality

 

Figure 1: Buy Now, Pay Later (BNPL) concept

 

 

It’s 11:47 pm. You’re scrolling through an online store and spot a jacket for £200. It feels a bit expensive. Then you see the option to pay £50 today and split the rest over four months. Suddenly, it feels affordable and you click “buy.” Nothing about the price has changed, but the way it’s presented makes it easier to justify. Instead of thinking about the full £200, you focus on the £50 in front of you.

Figure 2 shows how this plays out over time. The dotted line represents what consumers feel they are paying, low at first, then rising. The solid line symbolises real cost: flat and unchanged from day one.The gap between them is where financial trouble starts.

Figure 2: Perceived vs Actual Cost over time under BNPL

 

The problem? This changes how we see cost and risk, leading to both individual debt and market failure.

In the UK, around 27% of adults have used Buy Now, Pay Later (BNPL) in the past year (Poll and Byrne, 2021, p.6). This shows how normalised this form of borrowing has become. BNPL works by shifting attention away from the total cost and towards the first instalment. This reflects present bias, where individuals place more weight on immediate payments than future ones. The £50 feels manageable, while the remaining payments are treated as less important. This can be explained by hyperbolic discounting (Laibson, 1997), where future costs are heavily discounted, leading consumers to judge affordability based only on the present.

In reality, this creates a gap between perceived affordability and actual financial commitment. Many users underestimate the risks, with 42% reporting that they did not fully understand what they were signing up for, and 2 in 5 users having used BNPL without even realising it (Poll and Byrne, 2021, p.3). As a result, payments can quickly build up. The report shows that 41% of users have struggled to make a repayment, while FCA evidence similarly highlights that many consumers do not fully understand the terms and risks of BNPL. This suggests that consumers are misjudging affordability and taking on financial obligations they cannot sustain. BNPL, therefore, does not reduce the cost of consumption; it changes how that cost is perceived, often leading to higher spending and financial strain.

The Information Gap: When 'Buy Now' Meets 'Pay Later'

This misperception is not accidental. It is rooted in a deeper economic problem: asymmetric information.

The core issue is that both sides are guessing. Unlike banks that run deep credit checks, BNPL providers approve most purchases in seconds with almost no background checks, creating an adverse selection problem. Risky borrowers are the very people attracted to BNPL services because other lenders have already said no. Meanwhile, people with excellent credit have little reason to use BNPL when their rewards credit cards offer better perks. Over time, this drives away the "good" customers and leaves BNPL platforms with borrowers who are more likely to default. This is a version of "lemons problem," described by George Akerlof in the used-car market: when buyers can't tell a good car from a bad one, the market gets flooded with bad cars, or "lemons".

At the same time, moral hazard creeps in on both sides. Consumers take more risks because a missed payment won’t immediately wreck their credit score. BNPL providers don't report most of these small loans to credit bureaus, traditional banks can't see how much BNPL debt a person is carrying. This means they can lend to someone who is already drowning in debt without other lenders knowing, and without  bearing the full cost if that borrower eventually collapses (Berg, 2025).

But the information gap isn't one-way. Many users misunderstand the penalties for missed payments or how quickly a small debt can snowball (Di Maggio et al., 2022). BNPL interfaces are designed to feel casual and low-stakes, not like a binding credit agreement. Regulators in Norway have even accused BNPL provider, klarna of hiding the true cost of borrowing (Norwegian Consumer Authority, 2022). In early 2025, Klarna's credit losses jumped 17% as more customers struggled to keep up (Chosunbiz, 2025), highlighting the risks created by information gaps and  the need for transparency.

 

Regulations and Recommendations

To address these issues, the Financial Conduct Authority (FCA) of the UK will start regulating BNPL deferred payment credit from July 15, 2026. Service providers must obtain FCA authorisation and conduct strict affordability checks to prevent irresponsible lending. At the same time, loan terms must be fully disclosed to reduce consumer misunderstandings (FCA, 2026-1).

 

Therefore, we suggest that regulators require all BNPL platforms to share users’ total debt information and present real total costs and repayment risks in a unified, clear format. This will enable platforms to assess a user’s overall indebtedness before offering new credit, and also allow consumers to understand the full financial obligation before purchasing (FCA, 2026-2).

 

These rules will bring greater transparency and fairness to the BNPL market and address market imbalances caused by information gaps.

 

 

Conclusion: Why This Matters

Present bias tricks you into focusing on the £50. Asymmetric information means BNPL doesn't know your true risk, and you don't know the true cost. Adverse selection brings risky borrowers to the front of the line. Moral hazard encourages carelessness on both sides. The lemons problem then drives good customers away.

These concepts don't exist in separate boxes. They feed into each other. A consumer with present bias takes on a BNPL plan they can't really afford. Because BNPL doesn’t run proper credit checks, they get approved anyway. Since BNPL doesn't share data with other lenders, no one sees the debt adding up. When that consumer misses a payment, their credit score stays intact, so they do it again.

The result is market failure. Resources are misallocated, debt rises, and consumers end up worse off than if BNPL had never existed. The FCA's 2026 rules and our suggested data-sharing requirement would help close the information gap. But the best protection is still the simplest. Next time you see "pay £50 today," pause and ask yourself: can I really afford £200?

References:

1.    Akerlof, G. A. (1970), The Market for 'Lemons': Quality Uncertainty and the Market Mechanism, Quarterly Journal of Economics, Vol. 84, No. 3, pp. 488-500
https://www.jstor.org/stable/1879431

2.    Berg, J. (2025), Klarna and Afterpay Keep BNPL Data From Credit Bureaus, PYMNTS.com, August 2025
https://www.pymnts.com/buy-now-pay-later/2025/klarna-afterpay-keep-bnpl-data-from-credit-bureaus/

3.    Chosunbiz (2025), Klarna's Credit Losses Jump 17% as BNPL Defaults Rise
https://biz.chosun.com/en/en-international/2026/02/20/BXF6RDDP4FB4FAZY7X25K5ZSWY/

4.    Davenport, Evans, Hurwitz & Smith, LLP (2024), Managing a Buy Now, Pay Later Loan Program, Davenport Evans

https://dehs.com/managing-a-buy-now-pay-later-loan-program/

5.    Di Maggio, M., Williams, E., & Kalda, A. (2022), Buy Now, Pay Later: Credit Supply, Consumer Demand, and Welfare, National Bureau of Economic Research (NBER) Working Paper No. 30535
https://www.nber.org/papers/w30535

6.    Financial Conduct Authority. (2026-1). Buy Now Pay Later. https://www.fca.org.uk/consumers/buy-now-pay-later

7.    Financial Conduct Authority. (2026-2). New protections confirmed for Buy Now Pay Later borrowers. https://www.fca.org.uk/news/press-releases/new-protections-confirmed-buy-now-pay-later-borrowers

8.    Laibson, D. (1997) ‘Golden Eggs and Hyperbolic Discounting’, The Quarterly Journal of Economics, 112(2), pp. 443–478. Available at: https://doi.org/10.1162/003355397555253.

9.    Norwegian Consumer Authority (2022), Klarna Criticized for Misleading Marketing and Hidden Costs
https://www.forbrukertilsynet.no/english/klarna/

10.                  Poll, H. and Byrne, G. (2021) Buy Now...Pain Later? Citizen’s Advice. Available at: https://assets.ctfassets.net/mfz4nbgura3g/1YG7ZltPP1JfBXDLfAIPgI/132a8617c04231d32eca733af7cdbcfe/BNPL_20report_20_FINAL_.pdf.

11.                  Protections to help Buy Now Pay Later borrowers navigate their financial lives (2025) FCA. Available at: https://www.fca.org.uk/news/press-releases/protections-help-buy-now-pay-later-borrowers-navigate-financial-lives. 

What Economics Reveals About Illegal Drug Markets

 

Buying drugs is like a bag of Revels, you never know what you’re gonna get! It may be the real deal, or maybe it’s washing powder and rat poison. We will explore why this happens and explain market failures within the drugs market, like asymmetric information, moral hazards and externalities.

 

Secret ingredients in drugs: not love

Illicit drug markets famously experience a mismatch in information visibility, where limited buyer knowledge results in predatory tactics from sellers (Neuberger et al, 2017). Economists refer to this as asymmetric information, meaning that many drug users end up inhaling the same thing they use to wash their clothes (Maurice, 2024).

Studies have found that purity rates of Cocaine are as low as 30% (Peck et al., 2019). A race to the bottom occurs, where high-quality sellers are pushed out of the market, and users are taking more risks than ever.

The inevitable result is adverse selection – better known as the “lemons problem” modelled by George Akerlof. Simply put, as users cannot observe drug quality, they assume the worst. This means sellers of high-quality substances cannot charge higher prices due to buyer’s suspicions of receiving an £80 bag of flour. Buyers seek high-quality drugs but cannot distinguish quality, lowering expectations and willingness to pay. The result? Pure drugs are pushed out of the market as buyers are not willing to pay premium prices (Ben Lakhdar et al., 2013). To answer the government’s question of why drug deaths rise each year (GOV.UK, 2025), look no further than economics!

(Seven jailed for plot to supply Class A drugs in West Yorkshire, 2025)

 

Are drug dealers untouchable?

Economists explain this behaviour through moral hazard - where individuals take more risks when they do not bear the full costs of their actions. Are there any consequences of selling contaminated drugs for the sellers? No, the health risks are pushed onto the buyers, meaning riskier behaviour is actually incentivized. Cutting substances with cheap mystery ingredients easily boosts profit, so there is little incentive to keep the drugs pure.

Interestingly, this problem reduces on digital drug platforms as they have reviewing systems, similar to EBay (Galenianos et al, 2017). In economics, this is a type of market signalling, which gives buyers more indication of quality and holds sellers more accountable.

 

Highs and Harms: who really pays the price?

So, what happens when, in the best case no one really knows what they are buying and in the worst case, sellers do not even know what they are selling?

Unsurprisingly none of the adulterants used in drugs count towards your 5 a day. The harsh reality is that low-quality products pose serious private costs (Health, P., 2025). When drug purity is uncertain users are exposed to unpredictable dosages - one batch may be weak and the next dangerously strong.

This combination of unknown potency and dangerous additives creates an environment where overdose risk is significantly heightened, turning consumption into a gamble with potentially fatal outcomes.

The consequences do not end with the transaction; they spill over into society creating negative externalities, which represent the cost on society and is faced by those outside the transaction.

Perhaps the most significant negative externality is crime. With the absence of legal enforcement, black markets cannot rely on contracts or courts. Alternatively, violence and gang activity become key mechanisms for protecting transactions, settling disagreements and competing for market share.

Then there is the growing burden on the NHS. Whilst overdoses exist in all drug markets the increased risk caused by unpredictable purity and harmful chemicals directly translates into increased healthcare costs, which is bad news for the taxpayer.

Here is where it gets interesting, none of this is reflected in the price. From an economics perspective the market is sending the wrong signal. Users pay for the product whilst the cost of the wider damage is dumped on society. Naturally, when prices are artificially too low consumption is higher than what is best for society.

The illicit nature of the drugs market leaves the governments with their hands tied behind their back as they rely on enforcement and prohibition. However, enforcement is expensive and demand doesn't just disappear. This results in double-edged inefficiencies, with rising public spending, alongside lost potential tax revenue, while the demand and supply for dangerous low-quality drugs remains.  

 

How to fix this broken market?

If you are running a lemonade stand and the government decide to ban lemonade, will the population just not drink lemonade anymore? No, they will just buy it in a dodgy alleyway. Similarly, in the drugs market, prohibition has not worked, which has led to market failures being created.

As a result, drug dealers love the market being unregulated as they can chuck whatever they find under their sink and sell it as ‘the good stuff’. Arguably, the best solution would be to legalise the market so that it can be regulated. This means no more extortionate prices, quality control and worst of all for the dealers, TAX! And so, asymmetric information decreases by making quality more visible for buyers, and moral hazards decline as sellers will bear the consequences of adding mystery ingredients.

Would everyone start taking drugs? Well, in Portugal in 2001 they decriminalised all drugs and who would’ve thought, drug use in teens declined and so did overdose deaths (Murkin, 2014). So maybe we should take a page out of their book or listen to the green party…

Alternatively, the government can introduce education programs to make people aware of how drugs can be spiked, alongside the long-term effects of drugs on our health. Increased information should lead to a decline in drug use, moving closer to the socially optimal level, and so reducing the deadweight loss. However, there may be a time lag and let’s be honest, who’s going to read the leaflet?

 

What’s The Verdict?

Remember the bag of revels? The issue is, if you get a coffee one, it's not the nicest in the world but you’ll live. But in the case of drugs, if you pull the short straw, it may cost you your life, therefore there needs to be some drastic reform to help fix this broken market. Ultimately, economics is just not a load of theories, but it exists in real world, whether it be the sweets industry or the shady black market.

(Word count: 994)

References

Ben Lakhdar, C., Leleu, H., Vaillant, N.G. and Wolff, F.-C. (2013). Efficiency of purchasing and selling agents in markets with quality uncertainty: The case of illicit drug transactions. European Journal of Operational Research, 226(3), pp.646–657. doi:https://doi.org/10.1016/j.ejor.2012.12.003.

Galenianos, M. and Gavazza, A. (2017). A Structural Model of the Retail Market for Illicit Drugs. American Economic Review, 107(3), pp.858–896. doi:https://doi.org/10.1257/aer.20150540.

GOV.UK (2025). Deaths related to drug poisoning in England and Wales. [online] Ons.gov.uk. Available at: https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/deaths/bulletins/deathsrelatedtodrugpoisoninginenglandandwales/2024registrations.

Health, P. (2025). Deaths related to drug poisoning in England and Wales. [online] Ons.gov.uk. Available at: https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/deaths/bulletins/deathsrelatedtodrugpoisoninginenglandandwales/2024registrations.

Maurice (2024). The Hidden Dangers: Cutting Agents in Cocaine - NIRLAB. [online] NIRLAB - Handheld NIR analysis in the cloud. Available at: https://www.nirlab.com/the-hidden-dangers-cutting-agents-in-cocaine/.

Murkin, G (2014). Drug decriminalisation in Portugal: setting the record straight. [online] Available at: https://www.unodc.org/documents/ungass2016/Contributions/Civil/Transform-Drug-Policy-Foundation/Drug-decriminalisation-in-Portugal.pdf.

Neuberger, A., Oraiopoulos, N. and Drakeman, D.L. (2017). Lemons, or Squeezed for Resources? Information Symmetry and Asymmetric Resources in Biotechnology. Frontiers in Pharmacology, [online] 8. doi:https://doi.org/10.3389/fphar.2017.00338.

Peck, Y., Clough, A.R., Culshaw, P.N. and Liddell, M.J. (2019). Multi-drug cocktails: Impurities in commonly used illicit drugs seized by police in Queensland, Australia. Drug and Alcohol Dependence, 201, pp.49–57. doi:https://doi.org/10.1016/j.drugalcdep.2019.03.019.

Seven jailed for plot to supply Class A drugs in West Yorkshire. (2025). BBC News. [online] 21 Nov. Available at: https://www.bbc.co.uk/news/articles/c865ljynqepo.

The Tobacco and Vapes Bill: A Microeconomic Analysis of Policy Responses to Negative Externalities

 Can government intervention effectively correct market failures caused by tobacco and vaping, or does it risk new consequences?

 

Tobacco is the leading cause of preventable deaths in the UK, responsible for one death every five minutes (Warnock, 2023). To prioritize the health and safety of its citizens–particularly younger generations–the UK parliament introduced the Tobacco and Vapes Bill in 2024. This bill aims to prevent the legal sale of tobacco products to those born on or after 1st January 2009, creating a new tobacco-free generation. Alongside the supply of cigarettes, vapes, and other tobacco products, the bill also targets licensing and registration for retail stores selling these products. As of April 2026, the bill has been passed through both the House of Commons and the House of Lords and is set to become law in the week of the 27th

The Economic Problem

 

These policies are introduced in response to significant market failures within the tobacco and nicotine market such as negative externalities, asymmetric information, and moral hazard. Economic agents–consumers and producers–act to maximize their private benefits given the private costs they incur.

 

However, these decisions do not account for the external costs imposed on third parties as a result of economic activity. Tobacco consumption generates negative externalities such as increased public healthcare spending, sinking a whopping 3.1 billion to the government in the form of 1.9bn to the NHS and 1.2bn to local social care, as well as an unbelievable total cost to the UK of 18.3bn in lost productivity (A.S.H, 2024). Because these external costs are not reflected in market prices, the free-market outcome does not represent the true cost to society. “Externality is defined as a cost or benefit that affects a third party not directly involved in an economic transaction”, (Goolsbee et al, 2024).

 

This market failure is further exacerbated by asymmetric information and behavioral biases. Consumers, particularly younger individuals, may underestimate the long-term health risks associated with smoking and vaping. Tobacco companies contribute to this information asymmetry by downplaying the risks of their products through advertising and branding. In addition, the historical influence of tobacco companies on pop culture continues to shape perceptions today. As a result, consumers may overestimate the private benefits of smoking, such as social appeal or the enjoyment of flavors, leading to a biased decision-making and reinforcing overconsumption.

Figure 1: Negative externality of tobacco consumption

 

As shown in Figure 1, the overproduction of tobacco and nicotine products can be illustrated using a negative externality diagram. In an unregulated market, producers base their decisions on marginal private costs (MPC), ignoring the higher marginal social costs (MSC) associated with production. As a result, the equilibrium level of output is higher than the socially optimal level, while the market price is lower than the socially optimal price.

 

This leads to a deadweight loss, which refers to the loss of social welfare coming from economic inefficiency, represented by the reductions in total consumer and producer surplus between the socially optimal and market levels of output

Figure 2: Negative externality of tobacco production

 

The diagram above shows that the production of cigarettes creates a divergence between thr private and social benefits, pulling the social benefit down, rather than effecting the costs. This is represented as the gap between the MPB and MSB. In this unregulated market, there is a large amount of deadweight loss caused by the production of cigarettes.

 

The Economic Solution

 

The Tobacco and Vapes bill aims to correct this market failure. Through the implementation of stricter regulations, the overproduction will be minimized. Vaping products duty is set to be implemented from 1st October 2026, this is an example of Pigouvian taxing.

 

Pigouvian tax-

 

Raises the price of vapes to account for the external marginal costs. Despite the vaping products duty being implemented for minimizing social costs, its true effects are difficult to quantify due to the nature of externalities and this could be an over/underestimation given the volatile nature of the economy. The effect of the duty can be shown by a diagram below.

Figure 3.

 

Although the bill is effective in addressing negative externalities, it may also bring about some unexpected consequences. Due to the increase in taxes, the prices of tobacco and e-cigarette products will rise, putting greater economic pressure on low-income consumers (who spend a larger proportion of their income on such goods). Moreover, the smoking rate among low-income groups is often higher. Data from the UK consistently show that the lower the income or the lower the social economic status, the higher the smoking rate. (Fig. 4)

Figure 4, (NHS, 2021)

 

Another potential consequence we may see in the market from the implementation of the law is the formation of a black market for tobacco as the ‘Smoke Free Generation’ gets older. If the prices of tobacco and e-cigarette products are too high or are strictly restricted, some consumers may turn to illegal channels for purchase. These unregulated markets not only reduce the effectiveness of government policies but also may increase health risks, as the products sold illegally are not subject to quality control. Therefore, although the policy is effective in improving economic efficiency, it also creates fairness debates and faces practical challenges in implementation.

References

 

By UK Parliament Year: 2024 Container: Parliament.uk  https://bills.parliament.uk/bills/3879

 

Microeconomics

By Austan Goolsbee, Steven Levitt, Chad Syverson Year: 2024 Publisher: Macmillan Higher Education ISBN: 9781319066536

 

By NHS Inform Year: 2022 Container: NHS Inform URL: https://www.nhsinform.scot/healthy-living/stopping-smoking/reasons-to-stop/tobacco/

 

Tobacco kills one person every five minutes

https://news.cancerresearchuk.org/2023/05/31/tobacco-kills-one-person-every-five-minutes/

 

Latest figures show cost of smoking in England up 25% to at least £21.8 billion

https://ash.org.uk/media-centre/news/press-releases/latest-figures-show-cost-of-smoking-in-england-up-25-to-at-least-21-8-billion