Question: 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 to 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.
1. What would be the market mechanism solution?
2. What would be the central planning solution?
3. Which solution saves the most children?
4. Which solution do you prefer?