Ec 335 Midterm

Front 1

Federal Government - Public Expenditures (5)

Back 1

1. Social Security
2. Medicare
3. Medicaid
4. Defense
5. Interest on Natl Debt

Front 2

State/Local top Expenditures (4)

Back 2

1. Education
2. Medicaid
3. Transportation
4. Public Safety (Police/Fire)

Front 3

Pareto Efficient Govt

Back 3

Perfect Competitioni, no public goods (no spillovers), no externalities

Front 4

Reason for Govt intervention in Pareto-Efficient Economy?

Back 4

1. Contract enforcement
2. Distribution

Front 5

-Social Optimum?

Back 5

Social MB = Social MC

Front 6

Supply Curve-->

Back 6

Marginal Cost

Front 7

Demand Curve-->

Back 7

Marginal Benefit

Front 8

Negative Externality + Quantity

Back 8

PMC leads to too much production(Q)

Front 9

Tax on good with no externality

Back 9

loss from imposing the tax/gains from removing the tax

Front 10

DWL

Back 10

deadweight loss; excess burden

Front 11

Efficient Pollution abatement?

Back 11

MC of abatement same everywhere

Front 12

Firm: If MCA is less than or equal to the Pig. Tax then-->

Back 12

abate!

Front 13

Firm: If MCA is greater than Pig. Tax then -->

Back 13

pollute!

Front 14

Firm's opitmal choice?

Back 14

MCA = tax

Front 15

3 Pigouvian mechanisms

Back 15

1. tax
2. marketable license
3. subsidy (pay firms for abatement)

Front 16

Kyoto Protocal

Back 16

combination of reg., taxes, permits
only for developed countries

Front 17

Cambridge Stars

Back 17

Marshall (S&D)
Keynes (Macro)
Pigou (environment/externalities)
Ramsey
Joan Robinson

Front 18

Public Goods

Back 18

positive externality in consumption

Front 19

"pure public good"

Back 19

nonrivalrous, nonexcludable
fireworks/national defense/immunizations

Front 20

roads

Back 20

nonrivalrous until congested, potentially excludable

Front 21

non-excludability

Back 21

-->markets MAY fail

Front 22

non-rivalry

Back 22

different efficiency condition
Social MB calculated different

Front 23

Private Good

Back 23

Common: price
Choose different quantity

Front 24

Public Good

Back 24

Common: Quantity
Different marginal valuation

Front 25

Private Market Equilibrium: socially optimal if

Back 25

1. competition is there
2. no externalities

Front 26

Private Goods & "preference revelation"

Back 26

gets people to 'reveal' base on purchase

Front 27

Public Goods & preference revelation

Back 27

plagued by problems
"free-rider" -- public radio & T.V.

Front 28

Why not free ride?

Back 28

1. income tax deduction
2. warm glow
3. altruism
4. strong private preferences

Front 29

"crowding out"

Back 29

if public(govt) supports, less private support
is for goods under the grey area between pure public and pure private goods

Front 30

PARTIAL crowding out

Back 30

not dollar for dollar

Front 31

CB analysis: how do we know when to undertake public project?

Back 31

PDVbenefits greater than or equal to PDVcosts then YES

Front 32

PDV

Back 32

present discounted value

Front 33

private vs. public CB analysis

Back 33

for private firm, all costs benefits fairly easily measured in $
for public, social benefits and social costs

Front 34

"discounting"

Back 34

present value of something today is lower than 10 years later

Front 35

discounting & number of projects

Back 35

higher discount rate, fewer projects
projects more likely to be approved if benefits come early

Front 36

"creating jobs"

Back 36

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

Front 37

CB analysis: difficulties in measuring CB (3)

Back 37

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)

Front 38

"option demand"

Back 38

there might be a demand for the OPTION to use wilderness later

Front 39

If taxes mess up allocation of resources-->

Back 39

addiitonal cost to society

Front 40

true cost of project =

Back 40

(narrow cost of steel, etc.)*(Marginal Cost of Public Funds MCF)

Front 41

MCF=?

Back 41

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

Front 42

non-distortionary tax: MCF

Back 42

MCF = 1

Front 43

most taxes (MCF)?

Back 43

MCF is greater than 1

Front 44

lost consumer surplus =

Back 44

tax + DWL

Front 45

Sequential Majority Rule Voting will NOT

Back 45

necessarily yield a consistent set of social preferences

Front 46

Arrow's Impossibility Theorem

Back 46

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

Front 47

"the median voter theorem"

Back 47

if all have single-peaked prefs then pref of median VOTER will have majority support against any alternative

Front 48

Problems with Median Voter Theorem (5)

Back 48

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)

Front 49

Possible solutions to gerrymandering

Back 49

1. nonpartisan district drawing
2. proportional representation

Front 50

Positive externalities of public school?

Back 50

1. productivity
2. citizenship

Front 51

budget slope =

Back 51

-price ratio (neg. the price ratio)

Front 52

Traditional Welfare Program

Back 52

cash assistance even if no work

Front 53

Why MI voters reject voucher plan? (4)

Back 53

1. MEA powerful
2. voucher seen as subsidy for affluent
3. if voucher small, decrease in public support
4. increase in segregation

Front 54

Annuities?

Back 54

annual payments

Front 55

old-age insurance-->

Back 55

market failure in annuities market due to adverse selection

Front 56

DB = ?

Back 56

Defined benefit pension

Front 57

DC = ?

Back 57

defined contribution pension

Front 58

defined benefit pension?

Back 58

payments to retiree specified
(e.g. Social Security-formula)
can easily get out of balance

Front 59

defined contribution pension?

Back 59

ultimate benefit depends on rate of return
(e.g. MSU pension)

Front 60

Types/examples of Defined Benefit Pension

Back 60

1. funded (MI teachers)
2. SS: unfunded pay as you go

Front 61

what is a payroll tax?

Back 61

flat tax on labor earnings

Front 62

Name of first SS benefit check?

Back 62

Ida Fuller

Front 63

"start up generation"

Back 63

born 1870-1930
windfall, not necessarily paid back by future generations
windfall now fully ceased

Front 64

Samuelson, 1958

Back 64

Consumption loan model

Front 65

"Consumption Loan Model"

Back 65

SS: consumption loan to previous generations in hopes that get repaid by following generation

Front 66

"windfall"

Back 66

very high rate of return

Front 67

ROR for subsequent generations = ?

Back 67

= growth rate of economy
(pop growth)*(output/person)

Front 68

SS Benefit Calculation (6)

Back 68

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

Front 69

SS: SSA

Back 69

keep track of "covered" earnings
ceiling on taxable payroll

Front 70

SS: AIME

Back 70

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

Front 71

SS: translate AIME to Primary Insurance Amt (PIA)

Back 71

slope = 90%-->32%-->15%
progressive benefit formula

Front 72

SS: actuarial reduction for retirement before 65

Back 72

(actuarial increase for after 65)?

Front 73

SS: widows and widowers

Back 73

100% of PIA of deceased spouse

Front 74

SS: remarriage

Back 74

remarry before age 60, lose benefits from previous spouse

Front 75

Spouse Benefits =

Back 75

50% of PIA of working spouse

Front 76

ROR for 1- 2-earner couples?

Back 76

ROR for 1-earner couples greater than that for 2-earner couples

Front 77

Rate of Return under U.S. SS (4)

Back 77

1. much higher for startup generation
2. no actuarial adjustment for life expectancies
3. higher for 1-earner couples
4. prog. benefit formula

Front 78

ROR for SS: "no actuarial adjustment for life expectancies"

Back 78

ROR higher for: women, whites, nonsmokers

Front 79

ROR for SS: "prog. ben. formula"

Back 79

ROR higher for the poor
BUT poverty kills; largely offsets prog. ben. formula
on average, therefore, not much redistribution

Front 80

How can we tweak SS benefit formula?

Back 80

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

Front 81

1983 recession led to following three actions:

Back 81

Short Run
1. accelearted tax increases
2. some benefits taxable
Long-Run
3. increase age for full retirement benefits

Front 82

Goals for SS reform?

Back 82

1. avoid bouncing checks
2. increase real saving

Front 83

Solutions to SS (3)

Back 83

1. further increase retirement age
2. tweak the benefit formula
3. raise more revenue

Front 84

Solutions to SS: "raise more revenue" (3)

Back 84

1. increase payroll tax rate
2. increase payroll tax ceiling
3. finance with other tax revenues

Front 85

More Fundamental Solutions to SS:

Back 85

1. means testing
2. private/personal accounts

Front 86

adverse selection =?

Back 86

only a portion(badrisk) of the population participates in the (insurance) program

Front 87

*Situations Under Which Markets may not lead to socially optimal results (2)

Back 87

1. the price system may not give the desired distribution of income
2. conditions for perfectly comp. price system may be violated

Front 88

how can perfectly comp. price system be violated?

Back 88

1. imperfect competition (monopoly/monopsony)
2. imperfect or asymmetric information
3. externalities
4. public goods

Front 89

In the case of a negative externalities, what are the incentives of private producers?

Back 89

to take into account the PRIVATE marginal costs of production

Front 90

Social marginal cost =

Back 90

= private marginal cost + marginal environmental damage

Front 91

private-market equilibrium with neg. externalities leads to what?

Back 91

too much production

Front 92

"missing market"

Back 92

pollution externalities; since absence of market for clean air, f.e.

Front 93

Coase Theorem (2)

Back 93

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

Front 94

when can Coase's solution work?

Back 94

in cases where the transactions costs of making bargains or of using the legal system are small.

Front 95

what has been the main approach to overcoming pollution exernalities in the U.S.?

Back 95

regulation

Front 96

why isn't regulation efficient in reducing pollution?

Back 96

different firms and diff. products will usually have diff. marginal costs of pollution abatement

Front 97

Traffic congestion: SMC vs. PMC

Back 97

SMC is greater than PMC

Front 98

Goal of Kyoto Protocol?

Back 98

Global Warming

Front 99

Why U.S. not join in Protocol?

Back 99

fear that carbon taxes in the U.S. will cause industries to migrate to developing countries

Front 100

public good?

Back 100

a positive externality in consumption

Front 101

nonexcludability can lead to waht?

Back 101

the complete breakdown of the market mechanism because private producers may be unable to get their customers to pay

Front 102

nonrivalry: efficient condition

Back 102

where each individual's marginal rate of substitution should be equal to the marginal rate of transformation.

Front 103

efficient condition for public good:

Back 103

the sum of the marginal rates of substitution should be equal to the marginal rate of transformation

Front 104

with public goods, what do we do with curves?

Back 104

sum the individual willingness-to-pay curves VERTICALLY to get the social willingness to pay curve

Front 105

with private goods, what do we do with curves?

Back 105

sum the individual demand curves HORIZONTALLY to get the market demand curve

Front 106

free-rider problem

Back 106

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

Front 107

what does the free-rider problem lead to?

Back 107

it can lead to underprovision of the good

Front 108

what kind of projects are CBanalysis associated with?

Back 108

public projects; long-lived projects

Front 109

What is a common error in cost-benefit analysis?

Back 109

double-counting

Front 110

how are public projects financed?

Back 110

taxes

Front 111

MCF =

Back 111

Marginal Cost of Public Funds

Front 112

Marginal Cost of Public Funds...-->?

Back 112

the MCF is the factor by which the explicit costs of a project must be multiplied before they are compared with the benefits

Front 113

true costs of public project; taxes

Back 113

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.

Front 114

Optimal tax system with MCF?

Back 114

MCFs are all equal

Front 115

When MCF of a Pig. tax is less than one, then it means..?

Back 115

opportunity for tax reform

Front 116

Arrow's Impossibility Theorem

Back 116

under some fairly reasonable assumptions, it will not be possible to aggregate individual preferences into a well-behaved set of social preferences

Front 117

cyclical majority rule voting

Back 117

(arrow's)
no alternative can receive majority support against all others, even though individual preferences are perfectly rational.

Front 118

conditions underwhich voting paradox does not occur?

Back 118

if all voters have single-peaked preferences

Front 119

even if all voters have single-peaked preferences..

Back 119

control of the agenda can be very important

Front 120

limitations of the median voter theorem

Back 120

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

Front 121

Hotelling models

Back 121

suggest tendency for candidates to be driven to the center; however break down if more than two candidates

Front 122

Downs model

Back 122

political parties as maximizing votes in order to enjoy the power and perquisites of office.

Front 123

Niskanen

Back 123

budge-maximizing bureaucracy
increases spending above optimal level

Front 124

Tiebout sorting

Back 124

parents can move to a district that provides better schools

Front 125

If vouchers are too low, then...

Back 125

poor children may be affected adversely

Front 126

if vouchers available without restrictions on income

Back 126

then would offer a subsidy to affluent families

Front 127

According to Samuelson's consumption-loan model, what does the SS ROR depend on?

Back 127

rate of grwoth of population and rate of growth of productivity