A drug company has $1 billion to spend on research and development. It has to decide on one of two projects:
a. Spend the money on a project to fight deadly forms of influenza including bird flu.
b. Spend the money on a project to fight a condition of red, itchy skin known as eczema. The company expects both projects to be equally profitable, all things considered:
Yes, project a is riskier (since the rare flu may never come along), but if the disease hits, there will be a worldwide market willing to pay a lot of money to cure the flu.
Then one day, before deciding between a and b, the drug company's CEO reads in the newspaper that the European Union and the United States will not honor patents in the event of a major flu outbreak.
Instead, these governments will "break the patent" and just make the drug available everywhere for $1 per pill.
The company will only get $1 per pill instead of the $100 or $200 per pill it had expected. Given this new information about the possibility that governments will "break the patent," on which project is the company likely to spend its research and development money?
(Note: In the wake of the deadly anthrax attacks of 2001, the U.S. government threatened to do just this with the patent for Cipro, the one antibiotic proven to cure the symptoms of anthrax infection.)