The reason for social regulation of medications is due to four market failures. If we assume that individuals will act in their best interests to maximize happiness/personal gain then these personal values that people hold dear will degrade and diminish the effectiveness of medications being available to consumers. This is why that the government is needed to regulate this industry as they are supposed to be looking out for everybody's interests as a whole. The market failures talked about are: Public Goods: Must be provided by the government as private entities have no reason to provide this good as it is not profitable. Since there is no need to provide this public good an unregulated market will not provide these services. Examples of Public goods include orphan drugs and vaccines. Externalities: Exists when the production or consumption of a good affects someone else. The example used in the book is the overuse of antibiotics. If an unregulated market existed then people would be taking antibiotics whenever they felt sick and would lead to the rise of antibiotic resistant strains of bacteria. This is an externality since the individual taking the drug is not considering the effects it has on others. A non medical example would be people who purchase a good from a factory that produces pollution. The consumers are not worrying about the individuals who are living near the factory and are affected by the pollution. Natural Monopolies: Occur when the fixed costs of providing a good are high relative to the variable costs so the average cost of the good declines over time that the good is marketed. This limits the amount of people who can enter the market as the high upfront costs will not be profitable over a long duration. Examples of natural monopolies include: water, electricity, and natural gas. This is why government regulation is needed since most businesses have no incentive to open these types of businesses. Regulation incentivizes businesses to do research and produce this type of product. An example of this is drug companies marketing new drugs. The process of researching and marketing new drugs costs millions of dollars. To incentivize this the government gives the innovating business the rights to sell the drug as a brand to make up the money they have lost due to research. Information Asymmetry: Occurs as a result of an uninformed consumer. Most objects like a chair, or table have their value relatively apparent, but it is more difficult to ascertain the value of a medication if not trained in that field. The government must step in to minimize this failure by allowing educated professionals to make decisions about the drugs used by the consumer.