This article originally appeared in The New York Times That frightening word “pandemic” is back in the news. A strain of avian influenza has infected people in China, with a death toll of more than 25 as of late last week. The outbreak raises renewed questions about how to prepare for possible risks, should the strain become more easily communicable or should other deadly variations arise. Our current health care policies are not optimal for dealing with pandemics. The central problem is that these policies neglect what economists call “public goods”: items and services that benefit many people and can’t easily be withheld from those who don’t pay for them directly. Protection against communicable diseases is a core example of a public good, as is basic scientific research, which can yield new ideas that may be spread at very low additional cost. (In contrast, Medicare, which is publicly financed, has some elements of a public good, but any particular expenditure tends to benefit an individual receiving treatment, rather than being spread over a number of beneficiaries.) One obvious step forward would be to exempt biomedical research from cuts of the current federal budget sequestration. Research and development grants are a way to pay potential innovators up front — an important move, as an innovator can’t always charge high-enough prices for the value of its remedies when they’re actually needed. If a pandemic became a major issue in the United States, demand for remedies would surge far beyond the level associated with a typical seasonal flu outbreak, and permitting high prices would be unpopular — and perhaps unfair. The threat of contagion also makes it crucial to spread the net of protection as widely as possible, which again suggests low prices. Yet it is crucial to have some reward system in place for medical innovators. Well in advance of a pandemic, research needs to be done, and vaccine capacity and drug distribution facilities need to be built up. In the H.I.V./AIDS crisis, for instance, the United States was caught flat-footed — and an appropriate response has taken decades, in part because we were not prepared. Without government financing for such public goods, the capacity wouldn’t be there if a new pandemic produced a surge in demand. This would amount to an institutional failure. The government could also take another, more unusual step: it could promise to pay lucrative prices for the patents on drugs and vaccines that prove useful in… Read more…