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127 Cards in this Set

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Federal Government - Public Expenditures (5)
1. Social Security
2. Medicare
3. Medicaid
4. Defense
5. Interest on Natl Debt
State/Local top Expenditures (4)
1. Education
2. Medicaid
3. Transportation
4. Public Safety (Police/Fire)
Pareto Efficient Govt
Perfect Competitioni, no public goods (no spillovers), no externalities
Reason for Govt intervention in Pareto-Efficient Economy?
1. Contract enforcement
2. Distribution
-Social Optimum?
Social MB = Social MC
Supply Curve-->
Marginal Cost
Demand Curve-->
Marginal Benefit
Negative Externality + Quantity
PMC leads to too much production(Q)
Tax on good with no externality
loss from imposing the tax/gains from removing the tax
DWL
deadweight loss; excess burden
Efficient Pollution abatement?
MC of abatement same everywhere
Firm: If MCA is less than or equal to the Pig. Tax then-->
abate!
Firm: If MCA is greater than Pig. Tax then -->
pollute!
Firm's opitmal choice?
MCA = tax
3 Pigouvian mechanisms
1. tax
2. marketable license
3. subsidy (pay firms for abatement)
Kyoto Protocal
combination of reg., taxes, permits
only for developed countries
Cambridge Stars
Marshall (S&D)
Keynes (Macro)
Pigou (environment/externalities)
Ramsey
Joan Robinson
Public Goods
positive externality in consumption
"pure public good"
nonrivalrous, nonexcludable
fireworks/national defense/immunizations
roads
nonrivalrous until congested, potentially excludable
non-excludability
-->markets MAY fail
non-rivalry
different efficiency condition
Social MB calculated different
Private Good
Common: price
Choose different quantity
Public Good
Common: Quantity
Different marginal valuation
Private Market Equilibrium: socially optimal if
1. competition is there
2. no externalities
Private Goods & "preference revelation"
gets people to 'reveal' base on purchase
Public Goods & preference revelation
plagued by problems
"free-rider" -- public radio & T.V.
Why not free ride?
1. income tax deduction
2. warm glow
3. altruism
4. strong private preferences
"crowding out"
if public(govt) supports, less private support
is for goods under the grey area between pure public and pure private goods
PARTIAL crowding out
not dollar for dollar
CB analysis: how do we know when to undertake public project?
PDVbenefits greater than or equal to PDVcosts then YES
PDV
present discounted value
private vs. public CB analysis
for private firm, all costs benefits fairly easily measured in $
for public, social benefits and social costs
"discounting"
present value of something today is lower than 10 years later
discounting & number of projects
higher discount rate, fewer projects
projects more likely to be approved if benefits come early
"creating jobs"
almost never a true benefit
1. workers who build project --> opportunity cost
2. after project built --> jobs in businesses near to the project, job reshuffling
CB analysis: difficulties in measuring CB (3)
1. how to value time savings (roughly wage rate)
2. how to value lives saved by safety projects (compensating wage rate differential)
3. many projects are irreversible (Hell's Canyon Dam)
"option demand"
there might be a demand for the OPTION to use wilderness later
If taxes mess up allocation of resources-->
addiitonal cost to society
true cost of project =
(narrow cost of steel, etc.)*(Marginal Cost of Public Funds MCF)
MCF=?
Marginal Cost of Public Funds
the factor by which the explicit costs of a project must be multiplied, before they are compared with the benefits
non-distortionary tax: MCF
MCF = 1
most taxes (MCF)?
MCF is greater than 1
lost consumer surplus =
tax + DWL
Sequential Majority Rule Voting will NOT
necessarily yield a consistent set of social preferences
Arrow's Impossibility Theorem
Even though INDIVIDUAL preferences are well-behaved, they don't aggregate or lead to consistent social preferences unless:
1. dictatorship
2. some restrictions on preferences
"the median voter theorem"
if all have single-peaked prefs then pref of median VOTER will have majority support against any alternative
Problems with Median Voter Theorem (5)
1. if median choice not on ballot
2. not necessarily stable
3. gerrymandering
4. only subset of electorate votes
5. not necessarily efficient (don't reflect intensity of prefs)
Possible solutions to gerrymandering
1. nonpartisan district drawing
2. proportional representation
Positive externalities of public school?
1. productivity
2. citizenship
budget slope =
-price ratio (neg. the price ratio)
Traditional Welfare Program
cash assistance even if no work
Why MI voters reject voucher plan? (4)
1. MEA powerful
2. voucher seen as subsidy for affluent
3. if voucher small, decrease in public support
4. increase in segregation
Annuities?
annual payments
old-age insurance-->
market failure in annuities market due to adverse selection
DB = ?
Defined benefit pension
DC = ?
defined contribution pension
defined benefit pension?
payments to retiree specified
(e.g. Social Security-formula)
can easily get out of balance
defined contribution pension?
ultimate benefit depends on rate of return
(e.g. MSU pension)
Types/examples of Defined Benefit Pension
1. funded (MI teachers)
2. SS: unfunded pay as you go
what is a payroll tax?
flat tax on labor earnings
Name of first SS benefit check?
Ida Fuller
"start up generation"
born 1870-1930
windfall, not necessarily paid back by future generations
windfall now fully ceased
Samuelson, 1958
Consumption loan model
"Consumption Loan Model"
SS: consumption loan to previous generations in hopes that get repaid by following generation
"windfall"
very high rate of return
ROR for subsequent generations = ?
= growth rate of economy
(pop growth)*(output/person)
SS Benefit Calculation (6)
1. SSA - 'covered' earnings
2. Avg. index monthly earnings (AIME)
3. translate AIME to Primary Insurance Amount
4. Actuarial reduction for retirement before 65
5. Widows and Widowers
6. remarriage
SS: SSA
keep track of "covered" earnings
ceiling on taxable payroll
SS: AIME
Avg. index monthly earnings
1. indexed by average wage
2. 35 yrs of highest indexed earnings
3. min. level for quarter to be covered
4. if less than 40 covered quarters, no benefit
SS: translate AIME to Primary Insurance Amt (PIA)
slope = 90%-->32%-->15%
progressive benefit formula
SS: actuarial reduction for retirement before 65
(actuarial increase for after 65)?
SS: widows and widowers
100% of PIA of deceased spouse
SS: remarriage
remarry before age 60, lose benefits from previous spouse
Spouse Benefits =
50% of PIA of working spouse
ROR for 1- 2-earner couples?
ROR for 1-earner couples greater than that for 2-earner couples
Rate of Return under U.S. SS (4)
1. much higher for startup generation
2. no actuarial adjustment for life expectancies
3. higher for 1-earner couples
4. prog. benefit formula
ROR for SS: "no actuarial adjustment for life expectancies"
ROR higher for: women, whites, nonsmokers
ROR for SS: "prog. ben. formula"
ROR higher for the poor
BUT poverty kills; largely offsets prog. ben. formula
on average, therefore, not much redistribution
How can we tweak SS benefit formula?
1. price indexing as opposed to avg. wage
2. use 38/40 yrs of highest indexed earnings as opposed to 35
3. change parameters of progressive benefit formula
4. tweak cost of living adjustment
1983 recession led to following three actions:
Short Run
1. accelearted tax increases
2. some benefits taxable
Long-Run
3. increase age for full retirement benefits
Goals for SS reform?
1. avoid bouncing checks
2. increase real saving
Solutions to SS (3)
1. further increase retirement age
2. tweak the benefit formula
3. raise more revenue
Solutions to SS: "raise more revenue" (3)
1. increase payroll tax rate
2. increase payroll tax ceiling
3. finance with other tax revenues
More Fundamental Solutions to SS:
1. means testing
2. private/personal accounts
adverse selection =?
only a portion(badrisk) of the population participates in the (insurance) program
*Situations Under Which Markets may not lead to socially optimal results (2)
1. the price system may not give the desired distribution of income
2. conditions for perfectly comp. price system may be violated
how can perfectly comp. price system be violated?
1. imperfect competition (monopoly/monopsony)
2. imperfect or asymmetric information
3. externalities
4. public goods
In the case of a negative externalities, what are the incentives of private producers?
to take into account the PRIVATE marginal costs of production
Social marginal cost =
= private marginal cost + marginal environmental damage
private-market equilibrium with neg. externalities leads to what?
too much production
"missing market"
pollution externalities; since absence of market for clean air, f.e.
Coase Theorem (2)
1. with well-defined property rights and costless bargaining, private negotiations can overcome the externality problem and achieve the social optimal quantity
2. property rights can be vested with either the 'polluter' or 'pollutee' and the same results will occur
when can Coase's solution work?
in cases where the transactions costs of making bargains or of using the legal system are small.
what has been the main approach to overcoming pollution exernalities in the U.S.?
regulation
why isn't regulation efficient in reducing pollution?
different firms and diff. products will usually have diff. marginal costs of pollution abatement
Traffic congestion: SMC vs. PMC
SMC is greater than PMC
Goal of Kyoto Protocol?
Global Warming
Why U.S. not join in Protocol?
fear that carbon taxes in the U.S. will cause industries to migrate to developing countries
public good?
a positive externality in consumption
nonexcludability can lead to waht?
the complete breakdown of the market mechanism because private producers may be unable to get their customers to pay
nonrivalry: efficient condition
where each individual's marginal rate of substitution should be equal to the marginal rate of transformation.
efficient condition for public good:
the sum of the marginal rates of substitution should be equal to the marginal rate of transformation
with public goods, what do we do with curves?
sum the individual willingness-to-pay curves VERTICALLY to get the social willingness to pay curve
with private goods, what do we do with curves?
sum the individual demand curves HORIZONTALLY to get the market demand curve
free-rider problem
shows up in situations with some degree of nonrivalry or common benefit
individuals have an incentive to understate their preferences for the public good and try to "free ride" which means they will receive the good even though they do not produce it or help pay for it
what does the free-rider problem lead to?
it can lead to underprovision of the good
what kind of projects are CBanalysis associated with?
public projects; long-lived projects
What is a common error in cost-benefit analysis?
double-counting
how are public projects financed?
taxes
MCF =
Marginal Cost of Public Funds
Marginal Cost of Public Funds...-->?
the MCF is the factor by which the explicit costs of a project must be multiplied before they are compared with the benefits
true costs of public project; taxes
If the taxes do damage to the economy, then the true costs of the project must include the additional damage brought about by the increase in taxes.
Optimal tax system with MCF?
MCFs are all equal
When MCF of a Pig. tax is less than one, then it means..?
opportunity for tax reform
Arrow's Impossibility Theorem
under some fairly reasonable assumptions, it will not be possible to aggregate individual preferences into a well-behaved set of social preferences
cyclical majority rule voting
(arrow's)
no alternative can receive majority support against all others, even though individual preferences are perfectly rational.
conditions underwhich voting paradox does not occur?
if all voters have single-peaked preferences
even if all voters have single-peaked preferences..
control of the agenda can be very important
limitations of the median voter theorem
1. choices of median voter not necessarily efficient, since do not reflect intensity of preferences
2. med. voter will only represent the median preferences of the electorate if everyone votes
3. have difficulty in handlling multiple issues or the influence of money in political process
Hotelling models
suggest tendency for candidates to be driven to the center; however break down if more than two candidates
Downs model
political parties as maximizing votes in order to enjoy the power and perquisites of office.
Niskanen
budge-maximizing bureaucracy
increases spending above optimal level
Tiebout sorting
parents can move to a district that provides better schools
If vouchers are too low, then...
poor children may be affected adversely
if vouchers available without restrictions on income
then would offer a subsidy to affluent families
According to Samuelson's consumption-loan model, what does the SS ROR depend on?
rate of grwoth of population and rate of growth of productivity