Imagine an island economy that is periodically struck by an epidemic disease that affects only children. From past experience the islanders found that the disease strikes randomly, affecting 80% of all children. They also discovered a preventive antidote that reduces the chance of death if it is taken before the disease strikes.
A child who has taken no doses of the antidote has a 90% chance of dying when he or she contracts the disease. With one dose of the antidote, the chance of death is reduced to 10%. Two doses reduce the chance of 8%; three doses reduce the chance to 6%; four doses reduce the chance to 5%. Beyond four doses, the antidote has no further effect and the chance of death remains at 5%.
Suppose the island has 1,000 children and that the first sign of a new outbreak of the dreaded disease, the people have produced 1,000 doses of the antidote. The antidote must be used immediately if the children’s lives are to be saved.
Questions:
What is the (laissez faire) market solution to the problem?
What is the central planning solution to the problem?