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Box 9-1The Rationing and Allocation Functionsof Price in ActionThe rationing function of prices apportions market products to whoeveris willing to pay the most for them, ensuring that the product goes tothe person who values it the most. This maximizes the monetary valueof products (a proxy measure of their utility) across all consumers.The allocative function of prices apportions factors of production towhatever industry is able to generate the greatest profits from those factors,thus maximizing monetary value generated by all producers.By creating the greatest possible monetary value, the price mechanismbalances what is possible with what is desirable—but only if we define desirabilitysolely in terms of monetary value. Is monetary value what we actuallywant to maximize at all times? Does maximizing monetary valuealways ensure that resources are allocated to the most desirable use?A few decades back, Aventis developed the drug eflornithine, whichcures African sleeping sickness, a debilitating disease that threatensmillions of Africans. Although the only other treatment for advancedsleeping sickness is extremely painful to administer and often ineffectiveor even lethal, Aventis could not profit from selling the drug to poorAfricans. They had no market demand; their strong preferences for thedrug were unfortunately weighted by negligible purchasing power. Aventisdiscontinued production for African sleeping sickness but licensedthe drug to Bristol-Myers Squibb and Gillette for an alternative use: removingunwanted facial hair in women.When a good like eflornithine can be put toward the vanities of thewealthy or the basic needs of the poor, the rationing function of price apportionsit to the wealthy. When scientific research can be apportionedtoward developing cosmetics for the wealthy or life-saving medicines forthe poor, the allocative function of price apportions it toward cosmetics.The story has a happy ending. After the NGO Médecins Sans Frontièresthreatened to publicize the issue, Aventis agreed to again produceeflornithine for the treatment of African sleeping sickness. Still,while markets can do an amazing job at allocation, we must not assumethat they always apportion resources toward their most desirable use. aThe allocative function of price apportions few resources towardcures for lethal diseases that afflict the poor, and many towards the productionof cosmetics for the rich. When something exists that can beused toward either end, like eflornithine, the rationing function of priceapportions it towards the vanities of the wealthy rather than the basicneeds of the poor.a P. Gombe, Epidemic, What Epidemic? New Internationalist Spring 2003; P. Trouiller etal., Drug Development for Neglected Diseases: A Deficient Market and a Public-HealthPolicy Failure. The Lancet 359:2188–2194(2002); WHO Fact sheet no. 259: African Trypanosomiasis(Sleeping Sickness). Geneva: World Health Organization, 2006.