To specifically discuss the hypothetical cancer drug: If the drug company has a government approved patent on that drug, then they are entitled to charge whatever price they want. Regardless of the price set, the public is undoubtedly better off with the drug than without (assuming the drug is actually effective).
I'm not sure that I agree on this point. If the drug exists, but costs one billion dollars to buy it for treatment . . . then the public is no better off with the drug than without. There are what? Maybe four people in the country who can afford the drug? The company of course could make lots of money off it, but the public is effectively no better.
It is my opinion that the best tactic that the company can take is charging a profit that will allow to cover costs for that drug (both direct and R&D), some costs for drugs that have not panned out, some costs for drugs they will be developing in the future (which may or may not pan out), and of course some reasonable profit. If this drug has an overwhelming health benefit, the government will even step in to ensure that the company isn't profiting excessively. Once the patent runs out, the drug company will essentially need to reduce prices to compete with generic equivalents (assuming a fair market), so they need to recoup R&D costs in a limited timeframe.
It is my observation that many companies charge significantly more than what you believe the best tactic is, and don't appear to give a fuck if patients can afford it.
If patients can't afford it, they die. So they come up with a way to afford it, no matter the price charged. There's no market when there's no choice. Take insulin. There exists no cost at all to cover R&D. Insulin was given to the world for free by the researchers who discovered it. The reason that it's so expensive is that three companies provide 90% of the world's supply . . . and usually they agree to stay out of one another's turf. They are involved in price fixing. There exist no (or few) generic alternatives because of the complications of creating a biosimilar drug. The US government has not stepped in to prevent profiteering on this drug, despite it's overwhelming health benefit.
I guess my concern is that reality doesn't seem to match the idealized version of things that is described in the post above.
Been wanting to get back to this question, but I've been surprisingly busy not going in to work the last few days (in a good way). :)
Drug makers are out for profit. If there is a drug that costs $1 billion, than there are one of two possible scenarios: 1) the price is jacked up far higher than the cost to produce the drug (the hypothetical Dr. Evil scenario), or 2) the price reflects the cost to produce the drug (in the spirit of St. Patrick's Day, the drug is made from the sweat of Leprechauns and the essence of four-leaf clovers).
In the latter case, if the drug truly costs close to $1 billion per application to produce, then it should cost $1 billion, since we are talking some tens of millions of hours of human labor to produce. If patients can't afford it, then yes, to a certain extent, they will die, because the social burden of producing the drug is far higher than the benefit we get by saving the patient.
In the former case, where Dr. Evil is trying to charge $1 billion for a drug that costs $100 to produce, they are really just sinking their own profits, because there would be absolutely zero demand to purchase the drug for $1 billion (I think even the billionaires would balk). Every product on the market has a price that correlates to maximum profit for the company, and this is the price the market usually tries to set, even if there is a monopoly in that market. See, for example,
https://courses.lumenlearning.com/wm-microeconomics/chapter/profit-maximization-for-a-monopoly/.
Regarding your comment on insulin: I can't comment too much on specifics, other than to say that certain drugs (like insulin and many other health care treatments) have a captive market, and the government should do a better job of socializing such costs in the United States. As far as the comment that insulin was given to the world for free.... That is not entirely accurate, as the researchers were funded at their universities. They took very little risk in developing the drug, as compared to a for-profit company that develops a drug.