In this article, Kenneth Arrow argues that we should not have government health insurance (or food stamps or housing projects), and that instead we should just decide on a particular resource distribution and the market will reallocate them in the utility maximizing bundle of goods that is the Pareto optimal competitive equilibrium.
I like the idea from a libertarian-with-a-conscience/social safety net standpoint, although that theory is predicated on the notion that people will act in their rational best interest, which I do not often trust them to do. I also think that if the government is going to engage in reallocation of resources, it should have the ability to force people to spend money in ways that will not prohibit them from spending public funds on activities that will discourage future achievement.
The above diagram is from my Economics of health care class. The drawing is an Edgeworth-Bowley box.
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