Case Study: Public Finance Principle: The Free Rider Problem

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1. Case study:
Public Finance Principle: The Free Rider Problem
The free rider problem is when an individual or entity allows others to pay for a benefit or service they enjoy without paying for it themselves (Rosen & Gayer, 2014).
The topic is Health Insurance. In the article Duska concludes that there is an unclear notion to the right of health insurance (Duska, 2008). There are millions of people that do not have health insurance, and some of them do not, as they chose not to purchase it (Duska, 2008). Based on the fact that people have the “right to health care” and they chose not to purchase insurance, this in effect becomes a free rider issue. Having the right to health care and choosing not to purchase health insurance puts others
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This is relevant because setting market rates and targets for inflation is a key finance principle used by the government. Market interest rates help drive or control the level of inflation. In this article it is pointed out that rates have been low for an extremely long period of time and even at close to full employment, inflation remains near 1% (Ip, 2016). The situation here is what to do with rates. Inflation and interest rates are linked. Typically when rates rise, the economy slows and inflation is lowered. At this time, rates don’t have much room to go, or to be lowered. The article states that it is necessary to raise rates and it may be wise to allow the inflation rate to be higher to maintain the growth or allow the economy to continue to grow. Although raising the rates is not what we would typically see from the Feds when the inflation rate is so low, there is no room to lower the rates and employment is at a strong level. Ip (2008), states “John Williams, president of the Federal Reserve Bank of San Francisco, made the case for a higher inflation target in a bank newsletter.” The reason for raising the inflation target is not to slow the economy but more for the need to reset the rates and repair the Fed’s ammunition when necessary to lower rates. By raising the inflation target it would likely allow the rates to …show more content…
The present value is the future value discounted to the current period using the market interest rate as the discount rate (Baker, 2016). It is the responsibility of our finance department and the CFO to understand the value of our investments and to make decisions on investments based on anticipated future cash flows that will earn the most profit (on our investments) for the membership. It is efficient to determine the present value of a bond prior to making the investment to determine if it would be a wise investment decision. It is also important to understand the present value of an asset in determining what assets our institution should trade. For example, if the market price for an asset exceeds the calculated present value, it would be wise to sell (Baker, 2016). There are many examples of financial transactions that need to take place to determine the best or most efficient practices for the credit union. A specific example would be determining the best option for funding new loan growth. It is important to understand the present value of our investments to determine if selling them to raise funds or to borrow funds is the more profitable decision. Based on the timing of our investments and the rates at which we can borrow funds (either from the Feds or from the Federal Home Loan Bank) understanding the present value of

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