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64 Cards in this Set

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What are the assumptions of the Tiebout Model?
1. Large number of individuals who divide themselves up across towns with various provision of public goods.
2. A given town (i) has a given number of residents (N) who all demand the same quantity of the pubic good (G)
3. There is a uniform tax of the quantity of the public good being provided, divided by the number of people living in the town (G/N)
According the the Tiebout Model, where does inefficiency in public goods provision come from?
1. Shopping: it induces efficiency
2. Competition: it induces the right prices and quantities
At the federal level, these are issues because individuals are not able/willing to move to other countries if they are unhappy with one of the quantities of public goods being provided. Therefore the federal government experiences little competition which leads to inefficient public goods provision.
How does the Tiebout Model solve the preference revelation problem?
-Mobility is the preference revelation device.
-People have no incentive to lie. They must act on their lie by moving somewhere else where they will experience unideal amounts of the public good. They will save 1/N in tax by moving, but also receive 1/N less of the public good.
How does the Tiebout Model solve the preference aggregation problem?
This is solved because everyone living an a given town requires the exact same amount of the public good, G. Preferences are already aggregated in these towns.
What are the three main areas of problems in the Tiebout Model?
1. Tiebout competition
2. Tiebout financing
3. Spillovers
What are the problems associated with Tiebout competition? Perfect mobility.
It assumes perfect mobility: individuals want to vote with their feet and are able to carry out that vote. In reality, when an individual is located somewhere with friends/family, it would take a lot more than dissatisfaction with the quantity of one public good being provided for them to move.
What are the problems associated with Tiebout competition? Perfect information.
It assumes perfect information on the benefits that individuals receive and the taxes that they pay. If a school were buying excessively expensive equipment which raised an individuals taxes, they would not know this unless they were somehow exposed.
What are the problems associated with Tiebout competition? Choice.
It requires enough choice of towns so that individuals can find the right levels of public goods. In many cases, moving to another town is not close enough to keep job, etc.
What are the problems associated with Tiebout competition? Scale/size.
Requires sufficient scale or size for the provision of some public goods. Schools need more than just a few students. Efficiency of a public good is much higher if it is used by many rather than few. Fixed costs are dispersed among many. There would likely be groups who were not large enough to succeed.
What are the problems associated with Tiebout financing?
Requires equal financing of the public good among all residents, independent of a person's income, consumption of goods and services, or wealth. High inequitable, rich and poor pay the same, people will riot. Property tax is more generally used b/c its in proportion to the value of the homes. Problem here: poor chase the rich: poor want to live with people who are richer so they can free ride.
What are the problems associated with spillovers in the Tiebout model?
Assumes there are no externalities/spillovers. Assumes effects are only in a give town, because there is spillover there is a case for provision of public goods at a higher level of government (state?). People from other towns will come over to enjoy your park. Negative externalities, if police isn't financed well crime will spill over to next town making it more expensive if they value less crime etc.
How long has social security been effective?
It has been successful in over 20 nations for over 100 years.
How has relative income inequality progressed over time in the US?
The share of income that the poorest 1/5th receives has fallen over time, while the share of income that the richest 1/5th of the population receives has increased over time.
How does relative income inequality in the US compare to other countries?
It is much higher
What are the characteristics of welfare programs in the US?
Categorial v. Means-tested welfare, and Cash welfare v. In-kind welfare.
What is Categorical welfare?
Welfare programs that are restricted by some demographic characteristic such as being a single mother, or having a disability.
What is Means-tested welfare?
Programs that are tied to income and asset levels. Example: benefits are only given to those with incomes below the poverty line.
What type of welfare programs are most common in the US?
Most are both categorical AND means-tested. Ex: Cash welfare for low-income single mothers.
What are Cash welfare programs?
Programs that provide cash benefits to recipients.
What are In-kind welfare programs?
Programs that deliver goods, such as medical care or public housing, rather than cash.
What is the benefit guarantee?
The cash welfare benefit provided to individuals who have no other income, it varies across states and is too low to move a family out of poverty.
What is the benefit reduction rate?
The benefit that someone on welfare gets is reduced as income increases, this rate is the rate at which benefits are reduced per dollar of other income earned. Tends to be high (50-100%).
How does TANF work?
The federal government provides block grants to states that finance the program, they also impose a 5 year limit on any individual receiving it, and require the individual to work after 24 months at most of receiving benefits. Additionally, half of the state's TANF caseload must be working at any given point in time.
What is the largest welfare program in the US?
Medicaid, expendictures of $250 billion in 2003 (10x TANF)
Authur Okun compared income redistribution to a "leaky bucket," what did he mean?
We are carrying money from the rich to the poor, but some money leaks out along the way. The cost of "moral hazard". Social welfare function: less redistribution leads to more social efficiency.
Where does the leakage from the "leaky bucket" described by Authur Okun come from?
Administrative costs, taxation on higher income individuals will affect their labor supply/savings, and most importantly, by insuring against being poor, the programs create an incentive for individuals to become poor in order to qualify for the transfers.
What is the equation used to calculate actual welfare benefits?
B = G - T(earnings) Earnings - wh
B = actual benefits received
G = benefit guarantee level
T = benefit reduction rate
w = hourly wage
h = hours worked
What happens when you set actual benefits equal to zero?
It results in the "break-even formula" where the income level is reached where welfare eligibility ends
What is the iron triangle?
There is no way to change either the benefit reduction rate of the benefit guarantee to simultaneously encourage work, redistribute more income, and lower costs.
What are the goals of reforming a simple cash welfare program?
1. To encourage work
2. To redistribute more income
3. To lower costs
What is the Moral Hazard?
That people will try to do things in order to get on welfare. If they are earning too much they will quit their jobs so they can earn a little less but get a lot more leisure time, etc. They will spend the governments money in unproductive ways. eg drinking, etc.
What were the changes made by the PRWORA (Personal Responsibility and Work Opportunity Reconciliation Act) of 1996?
1. Cash welfare was changed from an entitlement (gov paid at least 1/2 of states expenditures on benefits), to a block grant (gov sent each state a check with fixed amount)
2. States could experiment with different levels of benefit reduction rates, or allow women to keep more child support, etc.
3. Time limits were imposed on welfare recipients (TANF 5 years), did not exist before PRWORA
4. Work requirements were imposed on wefare recipients (less strict before PRWORA)
5. Efforts to limit unwed motherhood: teenagers had to live with parents and attend school; 25% reduction in benefits for mothers who dont identify father of their children; states can impose family caps (benefits stop increasing at a certain # of children).
Effects of the 1996 PRWORA welfare reform?
1. Large financial windfall for states because block grants were tied to level of welfare expenditures in 1994 which dramatically exceeds current levels in every state.
2. Large increases in labor supply of single mothers.
3. No noticeable effect on fertility rates, caps didn't seem to affect the amount of children mothers had.
What factors are important to knowing if PRWORA was effective?
1. Incomes didn't fall on average but they did for women at the very bottom of the income distribution.
2. Incomes didn't rise very much or fall, and leisure time decreased.
3. Passed during a large economic expansion, can it hold up in a recession?
4. Long-run effects are on the children who grew up being raised by people who were not their mothers, what effect will this have on society?
What did welfare reform in 1996 appear to do?
Reduced welfare roles without significantly reducing the incomes of welfare recipients.
What are the two components that Social Security depend on?
The growth of the population and the wage rage.
What are the fundamental reforms suggested for social security in the future?
1. Investing the trust fund in stocks: but stocks are unreliable and benefits will fluctuate wildly with the stock market and different generations will receive different benefits.
2. Privatization: individuals invest their payroll taxes in various assets through individual controlled accounts: higher costs and lower paybacks, assumes individuals are competent, etc.
What are the two key problems of social insurance?
1. Adverse Selection
2. Moral Hazard
What is Adverse selection?
The fact that the insured individual knows more about their own risk level than does the insurer. People who want insurance are the ones who are already sick, and insurance companies only want to insure the healthy people.
What is Moral Hazard?
when you insure individuals against adverse events, you can encourage adverse behavior. The idea that when someone gets insurance they care less because they know they are insured, life insurance? do they really not care if they die sooner? doubtful!
What does it mean when someone wants to "smooth their consumption"?
If one gets the choice between two years of average consumption or one year of excessive consumption and one year of starvation, individuals prefer the former. This is because the year of excessive consumption does not raise their utility as much as the year of starvation lowers it.
In what cases will adverse selection not lead to market failure?
When most individuals are risk averse, such that they will buy an unfair policy.
In what ways could the government help adverse selection?
1. It could make everyone pay a fixed amount for a policy from a private company.
2. It could offer the insurance directly
Both would lead to low risks subsidizing the high risk individuals
What are reasons for government intervention in insurance markets besides adverse selection?
1. Externalities
2. Administrative costs
3. Redistribution
4. Paternalism
Reasons for government in insurance markets. Externalities.
Negative externalities arise from underinsurance. Health insurance, if you are ill and dont have insurance to get better you will make others ill. If you dont have autoinsurance and crash into someone etc.
Reasons for government in insurance markets. Administrative Costs.
Economies of scale in administrative costs. Suggests one large firm should supply, because costs of smaller firms would drive up the costs of insurance and make it less actuarially fair.
Reasons for government in insurance markets. Redistribution.
With full information, the outcome is for the careless consumer to pay ten times as much as the careful one, the government might want to intervene and subsidize the high premiums paid by some by the low risk individuals. Technologies however are advancing and genetic testing carries the implication that the genetically unlucky will have to pay much more than those with good genes.
Reasons for government in social insurance. Paternalism.
Individuals may not adequately insure themselves unless the government makes them.
What are the factors that determine moral hazard?
1. How easy it is to detect whether the adverse event happened
2. How easy it is to change one's behavior to establish the adverse event
What are the four components to optimal social insurance?
1. Individuals value insurance and want to smooth consumption.
2. Insurance markets may fail to emerge due to adverse selection.
3. Private consumption smoothing mechanisms may crowd out out government spending (self insurance in the case of unemployment).
4. Expanding insurance encourages moral hazard.
What are the positive externalities associated with government involvement in education?
1. Productivity
2. Citizenship
3. Credit market failures
4. Failure to maximize family utility
Government in education. Productivity.
Social benefits from increased productivity of an educated individual include spillovers to other workers, one persons productivity could raise that of their coworkers, and if higher productivity is reflected in higher pay the government receives more in taxes.
Government in education. Citizenship.
Education may make people more responsible citizens who commit less crime (most makes a difference for elementary level education)
Government in education. Credit market failures.
A family could borrow to finance childs education but the creditor cant observe if the child is a good risk to pay back the loan or not and will therefore likely offer too little credit in a situation such as this one.
Government in education. Family utility.
Parents may not choose appropriate levels of education for their children, without public provision, some smart children would be penalized for having selfish parents.
What are the arguments in favor of education vouchers?
1. Consumer sovereignty
2. Competition
Explain how vouchers affect consumer sovereignty
They enhance consumer sovereignty by allowing individuals to match their education choices with their tastes.
Explain how vouchers affect competition.
Competitive pressures allow the education market to work more efficiently by putting discipline on public schools by making private schools a more realistic option.
What are the problems associated with educational vouchers?
1. Excessive specialization
2. Stratification/ Segregation
3. Poorly targeted
4. Market may not be competitive
5. Don't account well for high cost students
Problems with edu vouchers. Specialization.
"football schools" or "art schools" could emerge to attract a particular market and could give less attention to basic elements of education. Accreditation and testing could help solve this.
Problems with edu vouchers. Segregation..
Could reintroduce segregation, children of disinterested/uninformed parents end up in low quality public schools and children of motivated parents end up in higher quality private schools
Problems with edu vouchers. Poorly targeted.
If they are targeted to families like Y edu spending goes up by more but this is difficult to do in practice.
Problems with edu vouchers. Competition.
The edu market may be described as a natural monopoly, there are fixed costs and economies of scale so it is not efficient to have many small schools competing with each other
Problems with edu vouchers. Costly students.
Some students are more costly to educate: special ed, schools have an incentive to avoid these students