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The Measles Epidemic of 1989-1991: Application
The Measles Epidemic of 1989-1991: Application
externalities in much more detail in Chapters 5 and 6, but this example illus-
trates the type of market failure that can cause the competitive equilibrium to
deliver a socially inefficient outcome. Later chapters in the book discuss other
types of market failure as well.
If the competitive equilibrium does not lead to the efficiency-maximizing
outcome, there is the potential for efficiency improvement through govern-
ment intervention. Since the government can take into account not only my
costs and benefits but also the costs and benefits to others as well, the govern-
ment can more accurately compare the social costs to the social benefits, and
induce me to buy insurance if the total benefits exceed the total costs. As we
emphasize in answering the fourth question, however, the fact that the private
market outcome is not efficiency maximizing does not imply that govern-
ment intervention will necessarily improve efficiency.
APPLICATION