Public Finance

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Two views on government

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organic and mechanistic

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unified budget

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document that includes all the federal government's revenues and expenditures

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regulatory budget

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an annual statement of the costs imposed on the economy by government regulations (currently there is no such budget)

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entitlement programs

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programs whose expenditures are determined by the number of people who qualify rather than preset budget allocations

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public finance

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focuses on the taxing and spending of government and their influecne on the allocation of resources and distribution of income

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substitution effect

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tendency of an individual to consume more of one good and less of another because of a decrease in the price of the former relative to the latter

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normal good

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a good for which demand increases as income increases and demand decreases as incomes decreases

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income effect

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the effect of a price change on the quantity demanded due exclusively to the fact that the consumer's income has changed

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correlation

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a measure of the extent to which two events move together

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treatment group

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group of individuals who are subject to the intervention being studied

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control group

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the comparison group of individuals who are not subject to the intervention being studied

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biased estimate

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an estimate that conflates the true causal impact with the impact of outside factors

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counterfactual

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the outcome for people in the treatment group had they not been treated

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experimental study

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eliminate bias! but not foolproof: sometimes hard to generalize. an empirical study in which individuals are randomly assigned to the treatment and control groups

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observational study

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an empirical study that relies on observed data that are not obtained from an experimental setting

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econometrics

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the statistical tools for analyzing economic data. use regression analysis

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regression line

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line that provides the best fit through a scatter of data points

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standard error

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statistical measure of how much an estimated regression coefficient might vary from its true value

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cross-sectional data

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data that contain information on entities at a given point in time

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time-series data

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data that contain information on individual entities at different poitns of time

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panel data

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datat that contain information on individual entities at different points in time

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quasi-experimental studies

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observational study that relies on circumstances outside of the researcher's control to mimic random assignment

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difference-in-difference analysis

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an analysis that compares changes over time in an outcome of the treatment group to changes over the same time period in the outcome of the control group

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instrumental variables analysis

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analysis that relies on finding some variable that affects entry into the treatment group but in itself is not correlated with the outcome variable

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regression discontinuity analysis

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an analysis that relies on a strict cut-off criterion for eligibility of the intervention under study in order to approximate an experimental design

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welfare economics

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the branch of economic theory concerned with the social desirability of alternative economic states

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edgeworth box

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device used to depict the distribution of goods in a two good, two person world. any point within this box represents some allocation of goods between the two people

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pareto efficient allocation

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an allocation at such a point that the only way to make one person better off is to make another person worse off.

allocations that are not pareto efficient are wasteful!

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pareto improvement

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a reallocation of resources that makes one person better off without making anyone else worse off

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contract curve

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locus of all pareto efficient points. point at which the indifference curves of both people are tangent: barely touching

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marginal rate of substitution

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the rate at which the individual is willing to trade one good for an additional amount of another (absolute value of the slope of the indifference curve). pareto efficiency requires that this be equal for all consumers

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production possibilities curve

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graph that shows the maximum quantity of one output that can be produced given the mount of the other output

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marginal rate of transformation

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the rate at which the economy can transform one good into another good. it is the absolute value of the slope of the ppf

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marginal cost

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incremental production cost of one more unit of output. a way to examine the marginal rate of transformation

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utility possibilities curve

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a graph showing the maximum amount of one person's utility given each level of utility attained by the other person

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social welfare function

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function reflecting society's views on how the utilities of its members affect the well-being of society as a whole

even if the economy generates a pareto efficient allocation of resources, government intervention may be necessary to achieve a fair distribution of utility

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monopoly

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market with only one seller of a good

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asymmetric information

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situation in which one party engaged in an economic transaction has better information about the good or service traded than the other party

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externality

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cost or benefit that occurs when the activity of one entity directly affects the welfare of another in a way that is outside the market mechanism

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public good

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nonrivalous (the fact that one person consumes a good does not prevent anyone else from doing so as well) and nonexcludable (either very expensive or impossible to prevent anyone from consumption) in consumption

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merit goods

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commodity that ought to be provided even if people do not demand it

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social security

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old age survivors and disability insurance

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annuity

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insurance plan that charges a premium and then pays a sum of money at some regular interval for as long as the policyholder lives

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consumption smooth

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reduce consumption in high-earning years in order to increase consumption in low earning years. risk averse people are willing to do that

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adverse selection

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phenomenon under which the uninformed side of a deal gets exactly the wrong people trading with it (that is, it gets an adverse selection of the informed parties)

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moral hazard

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the existence of insurance increases the likelihood of the adverse outcome

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fully funded approach

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pension system in which an individual's benefits are paid out of deposits that have been made during his or her working life, plus accumulated interest

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pay-as-you go (unfunded) plan

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pension system in which benefits paid to current retirees come from payments made by current workeres

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supplemental security income (SSI)

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welfare program that provides a minimum income guarantee for the aged and disabled

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average indexed monthly earning

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the top 35 years of wages in covered employment indexed each year for average wage growth. the aime is used to compute an individual's social security benefit

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primary insurance amount

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the basic social security benefit payable to a worker who retires at the normal retirement age or becomes disabled

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normal retirement age

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age at which an individual qualifies for full social security retirement benefts. historically, 65, but is now gradually being increased to 67

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actuarially fair return

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an insurance plan that on average pays out the same amount that it receives in contributions

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social security welath

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the PV of one's expected social security benefits minus expected payroll taxes paid

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social security trust fund

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fund in which social security surpluses are accumulated for the purpose of paying out benefits in the future

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off-budget items

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federal expenditures and revenues that are excluded by law from budget tools

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unified budget

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the document that includes all the federal government's revenues and expenditures

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life-cycle model

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theory that individual's consumption and savings decisions during a given year are based on a planning process that considers lifetime circumstances

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efffects of social security

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wealth substitution: the crowding out of private savings due to the existence of social security

retirement effect: to the extent that social security induces people to retire earlier, people may save more in order to finance a longer retirement

bequest effect:people may save more in order to finance a larger bequest to children in order to offset the intergenrational redistribution of income caused by SS

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endowment point

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the consumption bundle that is available if an individual neither saves nor borrows

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intertemporal budget constraint

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the set of feasible consumption levels across time

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dependency ratio

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the ratio of social security beneficiaires to covered workers: this ratio is increasing over time in the Untied States

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replacement ratio

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ratio of average benefits to average covered wages

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sustainable solvency

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expected pv of revenues and expenditures are equal into the indefinite future

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personal accounts

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retirement savings accounts managed by individuals as part of a social security privatization plan. they are also known as individual accounts or personal savings accounts

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carve-out accounts

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personal accounts that are funded by diverting payroll tax revenues away from the traditional social security system

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add-on accounts

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personal accounts that are funded from workers' resources rather than by diverting money from the payroll tax

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political economy

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the field that applies economic principles to the analysis of political decision making

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lindahl prices

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the tax share an individual must pay per unit of public good

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majority voting rule

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one more than half of the voters must favor a measure for it to be approved

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voting paradox

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with majority voting, community preferences can be inconsistent even though each individual's preferences are consistent

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agenda manipulation

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the process of organizing the order in which votes are taken to ensure a favorable outcome

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cyclign

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when paired majority voting on more than two possibilites goes on indefinitely without a conclusion ever being reached

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peak

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a point on the graph of an individual's preferences at which all the neighboring points have lower utility

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single-peaked preferences

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utility consistently falls as a voter moves away from his or her most preferred outcome

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double-peaked preferences

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if as she moves away from the most preferred outcome utility goes down but then goes up again

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median voter

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voter whose preferences lie in the middle of the set of all voters' preferences; half the voters want more of the item selected and half want less

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median voter theorem

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as long as all preferences are single peaked and several other conditions are satisfied, the outcome of majority voting reflects the preferences of the median voter

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logrolling

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the trading of votes to obtain passage of a package of legislative proposals

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independance of irrelevant alternatives

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society's ranking of 2 different projects depends only on individuals' rankigns of the 2 project, not on how individuals rank the 2 projects relative to other alternatives

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rent-seeking

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using the government to obtain higher than normal returns ("rents")

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cartel

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an arrangement under which suppliers band together to restrict output and raise price

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deadweight loss

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the pure waste created when the marginal budget of a commodity differs from its marginal cost