There is a revolutionary new drug that can save children's lives by preventing horrible diseases

This is an example of two main market failures: monopoly power and productive-allocative inefficiency. First of all, this is a perfect example of how a free market does not always allocate scarce resources efficiently. Very often, there are market failures in the healthcare sector because the R&D is very expensive and the market to buy the newly developed drugs is limited due to the purchasing power of an average person. When there is such a situation many firms prefer not to invest in R&D because it is not profitable. However, there are situations in which a pharmaceutical firm risks and develops new drugs despite the market limitations offering the new drugs at very high prices. In any case, the most affected is the average household because it is impossible to obtain the medicine. Additionally, this is an example of the negative effects of a monopoly. When there is only a firm with a new drug that can prevent horrible diseases, this firm can set the price level that it wants because there are no competitors that can offer a substitute product at lower prices. Therefore, there are no incentives to increase the cost efficiency that can benefit the demand side.