Should New Anti-Malarial Drugs be Subsidized?

We use analytical and numerical models to explain and quantify the welfare effects of subsidies for artemisinin combination treatments (ACTs), a valuable new class of antimalarial drugs. There are two (second-best) efficiency rationales for such subsidies: by expanding drug use, they reduce infection transmission from one individual to another, and they slow the evolution of drug resistance by deterring use of substitute monotherapy drugs for which resistance emerges more rapidly than for ACTs. Our analysis merges epidemiological models of malaria transmission among individuals and mosquitoes, evolution of drug resistance, and economic models of the demand for alternative drugs; parameter values for the simulations are representative of malaria prevalence in sub-Saharan Africa. We find that large subsidies for ACT are welfare improving across many plausible scenarios for malaria transmission, drug-demand elasticities, and evolution of drug resistance; the benefits of the policy are often several times larger than the costs.