Up to this point we have been primarily concerned with private insurance markets in which buyers and/or sellers behave in different ways than postulated by conventional economic norms of individual and firm choices under risk. But there are some kinds of insurance for large segments of the population that are financed and sometimes produced by the public rather than the private sector: flood insurance discussed in the previous chapter, insurance for retirement income (Social Security), insurance against job loss (unemployment insurance), and insurance for medical care costs (Medicare and Medicaid, to be expanded under health care reform).

Although potential anomalous buyer behavior provides some of the rationale for the development of these types of publicly financed insurance (as was the case with flood insurance when the private sector stopped offering coverage after the Mississippi floods of 1927), an equally if not more important rationale for such coverage is based on equity or distributional considerations. More specifically, some people have incomes in retirement or after job loss that others in society judge to be too low; some people would not obtain what others regard as adequate amounts of medical care. These are deemed unacceptable situations that the public sector steps in to correct.