Standard economic theory suggests that government is a cheaper way to internalize prevention externalities than private entities. This paper argues that this view depends on unexamined assumptions about transaction costs and the costs of improving state capacity. Public and private entities might be cheaper ways to internalize prevention externalities depending on differences in transaction costs, state capacity, and the willingness to improve public health. The 1878 yellow fever epidemic throughout the lower Mississippi Valley—one of the worst epidemiological disasters in the United States during the nineteenth century—provides ample context to examine this argument. Primary responses include municipal quarantine, flight from towns and cities, and the formation of refugee camps. Whereas municipal governments cheaply provided some quarantine services, individuals and private actors cheaply fled from infected areas and governed refugee camps. Responses in Memphis, one of the worst affected areas, further demonstrate that differences in these costs influence prevention externalities and how public and private entities respond to complex disease problems.