Why I’m Somewhat Optimistic About Zoetis’ and Eli Lilly’s Response to Agricultural Antibiotic Restrictions

Short version: the rents have already been extracted. John Tozzi writes (boldface mine):

The Food and Drug Administration announced plans to stop antibiotics from being fed to farm animals to make them grow faster late last year. The goal was to limit the rise of resistant bacteria that have developed immunity to the cures we have.

Since then, there’s been considerable debate about whether the rules, which ask companies to adjust drug label instructions to make sure animals only get antibiotics for medical reasons, would make any difference. One sign that the widespread use of antibiotics to raise livestock isn’t going away: The companies selling them don’t seem too worried…

If the FDA’s rule meant a significant decrease in the use of antibiotics in agriculture was on the way, executives from companies such as Lilly and Zoetis would likely sound more alarmed.

I’m not sure this is right. The actual cost of making antibiotics is cheap, and the physical plant investment just isn’t that large (and be reused for other chemical production processes). As best as I can tell, some of these antibiotics are off-patent as well. In other words, this is basically free money. While, as my Uncle Harry used to say, rich or poor, it’s always good to have money, this is basically rent extraction from a long-standing product: the costs were recouped long ago. In a different context, J.W. Mason described something similar with rent control (boldface mine):

Even more fundamental than the arguments I mentioned yesterday, the thing about rent control is that rents contain an element of, well, rents. (Separating the two senses of the word so cleanly has got to count as a big victory for right-wing ideology in economics.) This is especially true because buildings are so fricking long-lived. The average age of a multi-unit residential structure in the United States is about 30 years. In most cities with rent regulations, it’s much higher. For instance, the building I live in was built in 1902. The significance of this is that, even if an asset lasts forever, the share of its present value — which is what matters for the decision to buy/build it — that comes from the later years of its life goes arbitrarily close to zero. Say the discount rate is 6 percent. Then 95 percent of the value of a perpetuity comes from the returns in the first 50 years. 99.7 percent comes from returns in the first 100 years. In other words, even if the exact future rents of the building over its whole life were known with certainty, the rent being paid today would have had essentially zero effect on the decision to undertake the expense of putting up my building 110 years ago. Which means that it is not in any way compensation for that expense. Which means — apart from the costs of maintenance and improvements, which rent regulations always allow landlords to recoup — the rent I am paying is pure economic rent

So the Econ 101 point isn’t just a gross oversimplification — tho it is that — it’s substantively wrong even in its own abstract terms. It’s analyzing the market for the services of very long-lived assets as if it were the market for currently produced goods and services

Regulation that only limited rents in buildings older than 50 years (which, as it happens, is more or less what we have) wouldn’t have any effect on the supply of new housing, it would be a pure transfer from landlords to tenants.

I think these companies are seeing the hand writing on the wall, and are simply taking the money for now. They’ll put up less of a fight than expected.

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