Monday, October 26, 2009

Mankiw: H1N1 and the Spontaneous Order?

This post by Mankiw raises some questions I'm not sure I can answer.This involves allocating scarce resources(vaccine) given the constraints imposed by population genetics and epidemeology as they relate to the virus.

The following example ( although unrelated pathology) shows how markets work in the livestock industry in this regard. With beef cattle, a producer has every incentive to optimize vaccination of his calves prior to shipping ( to prevent shipping fever). Markets work. Typically calves preconditioned for health prior to shipping do better, and can often earn a price premium.

In crop production, there have historically been requirements for Bt biotech crops not to exceed 90% of total corn acreage. That implies leaving a 10% refuge. ( although there are some products out there that now meet the standards for a 5% refuge). This regulatory constraint was imposed to prevent selecting for Bt resistant pests.Without the constraint, enough producers might plant 100% Bt, selecting for resistant insects, leading to a population of resistent pests. This would create a negative externality imposed on producers in that area. Some literature has indicated that 10% could be to strict, or perhaps even a market based permit or quota system would work but the principle still holds. Would a producer have incentives without the regulatory constraint to plant the optimal acreage of Bt corn?

But what about controlling H1N1 in the human population? Would market prices ensure that people at the greatest risk ( determined by epidemiological evidence) get treated? For every low risk person that takes the vaccine, would the market price reflect the opportunity cost of a high risk person not getting it? Would the price rationed distribution of vaccine across the population also be the epidemiologically optimal distribution- would it result in minimizing the effects of H1N1 across the population?

I would say yes if A) those that were high risk were aware of the fact that they were high risk and they were able to outbid all low risk consumers. Eventually the price would reach a level that only informed high risk consumers would be willing to pay. High risk individuals would be identified via the price mechanism, and resources would be allocated accordingly.

Would it matter if people were poorly informed about their risk status and everyone assumed that they were high risk ( regardless of Media and public service announcements) and they bid for the vaccine accordingly? Wouldn't these people bid just as intensely as those that were truly high risk?

How would markets work in this instance?

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