Public Finance Exam 2

Front 1

efficiency

Back 1

Front 2

cost benefit analysis

Back 2

comparison of costs and benefits of public goods projects to decide if they should be undertaken

Front 3

3-steps to cost benefit analysis

Back 3

1. enumerate all costs and benefits of the proposed project

2. evaluate all costs and benefits in $ terms

3. discount future net benefits

Front 4

how to determine costs

Back 4

must include all costs

list direct resource costs and any costs not reflected in prices of inputs (i.e. externalities)

es.) loss of output from another program

Front 5

how to determine benefits

Back 5

dive into direct and indirect benefits

Front 6

direct benefits

Back 6

those increase in output or productivity attributable to the purpose of the product

Front 7

indirect benefits

Back 7

those accruing to individuals not directly associated with the purpose of the project

Front 8

why evaluate costs and benefits in dollars?

Back 8

in order for benefits to be comparable, they must be in the same units, i.e. dollars

Front 9

present value

Back 9

the maximum amount you would be willing to pay today for the right to receive the money in the future

Front 10

discounting

Back 10

the process of imputing an interest rate in order to arrive at PV

Front 11

PV Equation

Back 11

Front 12

PV that yield benefits over a number of years equation

Back 12

Front 13

PV that yields benefits fall into the future (50 years or more) equation

Back 13

Front 14

discount rate

Back 14

r

Front 15

discount factor

Back 15

(1+r)^n

Front 16

discount rate for private firm

Back 16

opportunity cost of what else the firm could do with the same funds (the after tax rate of return)

Front 17

discount rate for government

Back 17

based on private sector opportunity cost (government counts both after-tax portion of the return AND the taxes collected)

Front 18

admissible

Back 18

are the benefits greater that the costs?

Front 19

preferable

Back 19

are the net benefits the highest?

Front 20

admissible (in terms of PV)

Back 20

PV of discounted net benefits is positive

Front 21

Preferable (in terms of PV)

Back 21

PV of discounted net benefits is highest (when projects are mutually exclusive)

Front 22

economic costs (opportunity costs)

Back 22

the value of the resource in its next best use

Front 23

rent

Back 23

payment in excess of what is necessary to employ the resource

Front 24

rent

Back 24

payment in excess of what is necessary to employ the resource

Front 25

reservation wage

Back 25

value of leisure time expressed by workers

Front 26

leisure time

Back 26

cost to society for hiring unemployed labor

Front 27

road repair example (for reservation wage)

Back 27

Front 28

imperfectly competitive markets

Back 28

inputs produced in imperfectly competitive markets also produce rents

prices for the input will overstate the actual cost of creating the input

P>MSC

true cost to society will be overstated

Front 29

key issues with measuring benefits

Back 29

1. avoid double counting

2. don't include pecuniary spillovers

3. subtract subsidies

4. calculate shadow prices

Front 30

avoid double counting

Back 30

focus on the physical output of the project

ex.) irrigation project- do not include both the value of additional crop grown AND the increase in the value of land

Front 31

pecuniary externalities

Back 31

effects on third p;parties are not "true" externalities when they are included in prices

Front 32

pecuniary spillovers

Back 32

should not e included when measuring benefits of projects

Front 33

subract subsidies

Back 33

the price of the output may be inflated due to subsidies

Front 34

shadow prices

Back 34

estimated prices for goods that do not have an explicit market

ex.) look at the relationship b/w distance from the park (travel cost) and number of visits

Front 35

world bank definition of poverty

Back 35

hunger

lack of shelter

being sick and not being able to see a doctor

not being able to go to school

not knowing how to read

not having a job

losing child to illness due to unclean water

powerlessness

Front 36

poverty: relative measures

Back 36

based on individual's income relative to the income of other in the economy (significantly less than average)

implies that poverty rate never changes

Front 37

problem with relative measure

Back 37

does not address quality of life at the bottom of income distribution

Front 38

Fuchs point

Back 38

defines poor as those with incomes less than 1/2 of the median income for the nation

means that you could reduce poverty rate

Fuchs point is changeable

Front 39

poverty: absolute measures

Back 39

based on individual's ability o purchase some bundle of goods

specific level of income below which a person is considered to be impoverished

income needed to assure min subsistence

ex.) minimum caloric intake for survival

Front 40

Poverty in US

Back 40

measured using absolute approach

Front 41

poverty threshold

Back 41

level of income below which a household is classified as poor in US

2011: threshold was $22,811 per year for family of 4

adjusted annually for inflation but NOT adjusted for geographic differences in cost of living

Front 42

CEA line

Back 42

dates back to 1963 ($3,000/yr/fam)

based on "minimally adequate diet" for family of 4; $1,000 per year for food

low income families were found to spend 2/3 of income on non-food items

Front 43

SSA Index

Back 43

adjusted CEA line for family size and number of people in the family over age of 65

uses equivalency scale

Front 44

what is current poverty rate?

Back 44

between 12% and 15%

elderly have lowest poverty rate (SS, medicare)

children have highest poverty rate

Front 45

poverty gap

Back 45

how far below the poverty line is the income of poor people

Front 46

problems with measuring poverty

Back 46

1. "in-kind" income not included

2. underreporting

3. income mobility

4. uncounted poor

5. latent poverty

Front 47

"in-kind" income

Back 47

from govt: food stamps, medicaid/medicare, subsidized housing, energy assistance, etc.

from relatives/friends/private organizations: babysitting, meals, transportation, gifts. etc.

Front 48

underreporting

Back 48

fear off losing benefits

income from illegal sources

Front 49

income mobility

Back 49

many spells of poverty are fairly short

3 out of 5 families move out of poverty within one year

1 in 10 families stay in poverty more than 5 years

Front 50

uncounted poor

Back 50

not everyone is included in the poverty surveys (homeless, institutionalized)

disguised poverty: household structure may include members not sharing equally in household income

Front 51

latent poverty

Back 51

government transfers lift 46.6% of pre-transfer poor out of poverty

SS accounts for largest reduction in the "official poor"

Front 52

social insurance

Back 52

poverty may be due to factors beyond one's control (i.e. ill health)

Front 53

public good

Back 53

everyone may be better off if low-income people are better cared for

Front 54

protection

Back 54

reduce likelihood of riots, revolution

Front 55

private vs. government charity

Back 55

private contributions fall in periods of poor economic performance

free rider problem

government is coercive solution

Front 56

status test

Back 56

ensure that people belong to a particular group

i.e. disabled, elderly, families w/ dependent children

Front 57

who is eligible for anti-poverty programs?

Back 57

pass status test

pass means test

Front 58

means test

Back 58

income and asset levels that are below the minimally required amounts to justify assistance

Front 59

cash transfer anti-poverty programs

Back 59

TANF

SSI

EITC

Front 60

TANF

Back 60

for the poor

temporary and limited family support through grants to state governments

Front 61

SSI

Back 61

for the old, blind, and disabled

Front 62

EITC

Back 62

general assistance paid upon tax filing

Front 63

in-kind anti-poverty programs

Back 63

medicaid

SNAP

Front 64

medicaid

Back 64

basic health care services for the poor

Front 65

SNAP

Back 65

formerly food stamps; EBT cards redeemable for food and related programs

Front 66

constrained utility maximization

Back 66

perfectly rational consumers pursuing self-interest

based one preferences and budget

Front 67

preferences

Back 67

what a consumer wants

expressed in terms of utility (indifference curves)

Front 68

budget

Back 68

what a consumer can afford

Front 69

three key assumptions of rational behavior

Back 69

completeness

transitivity

monotonicity

Front 70

completeness

Back 70

consumer can make a decision

a>/=b or b>/-a or a~b

Front 71

transitivity

Back 71

consistent choices

if a>b and b>c, then a>c

Front 72

monotonicity

Back 72

more is better than less

Front 73

indifference curve

Back 73

typically shown in the context of a two-good world, on a 2-dimensional graph

Properties: every bundle is ons one indifference curve, two curves never cross, not "thick", slopes downward, bundle that has more of all goods is on a higher indifference curve ("no satiation")

Front 74

indifference map

Back 74

all of a consumer's indifference curves

Front 75

utility function

Back 75

mathematical representation of a person's preferences

Front 76

utility function formula

Back 76

Front 77

indifference

Back 77

as you move along a given indifference curve, you give up some of one good, but get ore of the other. you are therefor INDIFFERENT

Front 78

indifference curve example

Back 78

Front 79

marginal rate of substitution

Back 79

slope of indifference curve

rate at which consumer is willing to trade off the two goods

ex.) how many more movies would the consumer require to compensate him for the loss of a CD?

Front 80

marginal rate of substitution formula

Back 80

Front 81

budget constraint

Back 81

the amount of money a consumer has to spend on goods and services

Front 82

budget constraint formula

Back 82

Front 83

budget constraint graph

Back 83

Front 84

constrained utility maximization graph (highest utility within budget constraint is middle line)

Back 84

Front 85

constrained utility maximization formula

Back 85

Front 86

substitution effect

Back 86

change in consumption due to change in relative prices, holding utility constant

Front 87

income effect

Back 87

change in consumption due to feeling "poorer" after price increase

Front 88

Superiority if income grant to subsidy

Back 88

Front 89

excess burden of a subsidy

Back 89

Front 90

why use in-kind benefits instead of cash?

Back 90

in-kind benefits can only have a value less than or equal to cash benefit

1. paternalism

2. political support from producer groups

3. merit goods

4. target efficiency

5. target efficiency

5. moral hazard

Front 91

how does rise in wage rate effect income and substitution?

Back 91

income effect: consume more leisure time (work less)

substitution effect: consume less leisure time (work more), the rise in the wage rate increases the opportunity cost of leisure time

Front 92

rise in wage rate graph

Back 92

Front 93

earned income tax credit (EITC)

Back 93

introduced in 1975 to offset increases in FICA taxes (aka payroll or SS taxes)